Two weeks ago, we wrote that “3Q Options Shouldn’t be Trusted” and that so much money was deferred from 2Q to 3Q, cancellations would be abnormally high as a result. However, with cancellations wrapping up over the next week or so, they appear to be coming in even heavier than we expected – 8x to 10x more than normal 3Q levels. As expected, pharma/healthcare/tech/streaming have optioned far less than most categories, but virtually every vertical has been active on the options front. Our overall view on the 3Q ad market across national and local is unchanged.
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With earnings season largely wrapped up, there were few surprises in 1Q. It was bad, but mostly in-line w/our expectations (outside of a major relief rally in some cases), but looking ahead, we would note the following; 1) when sports come back, there will be a lot of supply and the movie, beer/alcohol, & auto categories are heavy sports advertisers – we think they will lag the recovery and we’ll hear about the weakness once games start to air; 2) with lower demand, advertisers are demanding steep rate decreases, but settling for modest ones; 3) 3Q is way too early to call, but the 2nd derivative will be better & investors have been playing that theme in a group that has been beaten up. We continue to prefer FOXA, NXST, and VIAC.
HSD subs beat handily, though the revenue wasn’t really there to match it given some of the economic headwinds from COVID (i.e. – subs added through the Remote Education Program aren’t paying), and we expect revenue could be somewhat volatile for the balance of the year. Bottom line: While we continue to like the MSD-ish rev. and EBITDA growth in this challenging macro we remain on the sidelines on premium valuation as CHTR continues to trade well above its peers at 11.4x ‘20E EBITDA – we maintain our PP.
With the beginning of May comes 3Q options season – it will likely drag on and will be hard to interpret. Recall, many advertisers shifted a portion of their 2Q budgets to 3Q. As a result, we expect; 1) several categories to look for extensions on options closer to 3Q, 2) 3Q will see much more exercising of options than usual, 3) scatter volumes will be light, and 4) as of now, it continues to look like 2Q will be the bottom in terms of Y/Y ad declines.
The miss vs. our estimate was all within residential revenue – with video missing by 1.1% (or $48MM) and HSD missing by 1.4% (or $64MM). Commercial, advertising, and mobile were all in-line to slightly above our estimate.
CHTR stands to be less financially impacted from COVID-19 and the related societal lockdown given its primary data connectivity business has actually become more important to consumers than ever. However, there company is exposed to small and medium businesses and advertising (17% of rev. combined) so it won’t be totally unscathed. While we like the MSD revenue and EBITDA growth in this challenging environment we remain on the sidelines on premium valuation as CHTR trades at 11x ‘20E EBITDA – maintain Peer Perform.
Looking back to prior downturns, media companies were often viewed as early cyclicals, but secular issues have changed that narrative for many. That being said, April should mark the bottom for the industry, with declines of 50%+ in some markets, with even digital down 40%+ for many. For traditional media, we continue to believe the recovery in advertising will be flatter and take longer than anticipated, with risk to estimates into 2021.
When we lowered our core advertising estimates on April 1st, we noted that 2Q political advertising had slowed. After an extraordinarily robust 1Q20 for political, 2Q20 has weakened mainly due to 1) both Bloomberg and Bernie dropping out of the Democratic presidential primary and 2) campaigns / PACs reluctance to air ads during these uncertain times. We now assume 4%-5% growth for spot TV political advertising to ~$3.25B, with risk to the downside (vs. our prior $3.37B, +9% Y/Y growth).
The hottest names this week were WWE (1,474 bps better than the S&P), NFLX (1,373 bps), AMCX (774 bps), CABO (771 bps), and DISH (388 bps).
The hottest names this week were AMCX (1,278 bps better than the S&P), TGNA (1,030 bps), MDP (706 bps), FOXA (348 bps) and CMCSA (174 bps).
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