Media Stocks Are Tanking Again. This Time, It's Time Warner

TV Ratings Declining More Than Expected

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Time Warner CEO Jeff Bewkes after addressing the Cannes Lions International Festival of Creativity in France in June.
Time Warner CEO Jeff Bewkes after addressing the Cannes Lions International Festival of Creativity in France in June. Credit: Christophe Morin/Bloomberg
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Three months ago, Walt Disney Co.'s darkened outlook dragged down media stocks. Now, it's Time Warner Inc.'s turn.

Shares of Time Warner, the owner of HBO and the Warner Bros. studio, plunged as much as 10% in New York trading Wednesday after lowering its 2016 earnings outlook. The stock dropped as low as $69.27 in the biggest intraday decline since Aug. 5. Disney lost as much as 4.1%, while Viacom sank 8.9%. Rupert Murdoch's 21st Century Fox, which earlier posted lower-than-estimated quarterly revenue, slid 10%.

Time Warner's outlook for next year revived concerns about the impact of cord cutting -- Americans who drop traditional pay-TV packages for cheaper online alternatives. In August, Disney surprised investors by reporting quarterly revenue that fell short of analysts' projections and cutting its forecast for cable-TV profit. That sparked concern over the growth of its sports network ESPN, fueling a sell-off in media stocks, with entertainment companies losing more than $60 billion in value over two days.

"We're seeing a replay of the Disney day," said Brett Harriss, a media analyst at Gabelli & Co. He cited the impact from foreign-exchange fluctuations and a drop in subscribers in both cases.

Aggressive content investment
Time Warner's earnings are "more likely" to be about $5.25 a share next year, down from the "close to $6" forecast it had stuck to for the past year, due mostly to the impact of foreign exchange rates but also to increased investments in programming, CEO Jeff Bewkes said on an earnings conference call.

"Programming remains by far the most significant area of investment for the company," Mr. Bewkes said. "We have plans to invest aggressively in 2016 and beyond."

The company had also previously forecast earnings of more than $8 a share in 2018. Now it expects to fall short of that target as well.

Subscribers to its Turner networks dropped 1% more than the company anticipated, Chief Financial Officer Howard Averill said on the call.

"Ratings at our key domestic networks have declined to a greater degree than we anticipated a year ago and that will negatively affect ad revenue," Mr. Averill said. Those networks include TNT, CNN and TBS.

Pulling back on feeding Netflix?
As consumers watch more TV online, Time Warner is making investments outside the traditional pay-TV bundle. It introduced a web-only version of HBO in April and John Martin, chief executive officer of Time Warner's Turner Broadcasting, said Wednesday that the company is "in talks with numerous interested parties to potentially launch" other web-only services.

Time Warner is also evaluating whether to delay licensing content to online streaming services and offer more shows on demand to consumers who pay for cable, Mr. Bewkes said. Analysts have said the increasing popularity of Netflix and other streaming video services may be fueling cord-cutting and ratings declines.

"There's no doubt that ratings are falling, advertising is falling, and that's leading to a worsening of the price-value of the bundle and that's leading to cord cutting and cord shaving," said Rich Greenfield, an analyst at BTIG.

Fox, Mr. Murdoch's film and TV company, also surprised investors by saying Wednesday that it will no longer provide specific earnings targets beginning in the fiscal year that starts next July. Instead, it will give "quantitative and qualitative information" on areas where it has "good visibility," Chief Financial Officer John Nallen said on a conference call. The company reaffirmed its previous forecast for earnings growth this fiscal year in the mid-single-digit percentage range.

"We don't want to chase a short-term target through changes in our operating plan merely because a currency rate changes, a movie release shifts or underperforms, or we modify our approach to SVOD licensing," Mr. Nallen said, referring to subscription video-on-demand. "It's not good for our management team nor for our shareholders."

Geetha Ranganathan, analyst at Bloomberg Intelligence, said Fox's move "indicates a more cautious approach as the media landscape evolves."

-- Bloomberg News

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