The blue-chip bellwether that has not missed quarterly estimates or lowered its annual forecast midstream in more than a decade gave corporate America a jolt by doing both. First-quarter earnings reports, as well as all of 2008, will be fraught with struggling financial scenarios and earnings. Media is among the sectors that will be clobbered badly, given its dependence on advertising and its discretionary consumer spending.
GE chairman and CEO Jeffry Immelt referred to the situation as a "bump in the road" especially caused by "disruption in capital markets." In fact, this will be a long highway full of deep potholes. That GE lowered its 2008 earnings outlook is evidence that the recession could be a longer-term event. Immelt attributed declines to the credit crisis--financial comprises 40% of GE's business--and the inability to raise funds by selling mostly real estate assets. Both factors will have a direct and indirect impact on every company reporting results in the coming months. GE also more subtly referenced two other potentially damaging factors--rising inflation and deteriorating global growth (outside of emerging markets). GE lost $45 billion of its market cap from the 13% decline in its stock on Friday in response to its first-quarter misses--every penny of its 7 cent miss on earnings per share represents $700 million.
As a disciplined, consummately managed global conglomerate with diverse holdings from media and financials to health care and industrial, GE's financial outlook encompasses forces that are systemic to all companies. The deteriorating fundamentals include declines in consumer and corporate spending, valuations and return on investment.
Yet despite companies putting the best face on their financial situations so far (GE was upbeat about its 2008 prospects as recently as early March), there will be more bad news out of earnings reports this month and into May. Forecasts for 2008 and 2009 will be recalibrated. There will be massive cutbacks in spending and expansion. The Wall Street call for improved credibility (there was no pre-announce warning from GE) and the selloff of encumbering assets (here come the NBCU sale rumors again) have already begun.
Media-specific results from GE's NBC Universal highlighted that early election-year spending will provide local broadcasting with less revenue than in the past and that overall ad spending, even on the Internet, has slowed. NBC's owned TV stations reported an 11% decline in first-quarter ad revenues; digital revenues rose only 5%. Overall, NBCU reported only a 3% rise both in revenues and in operating income, rather than the 10% revenue growth and 5% to 10% profit growth it has forecast for itself. The same metrics could prove as weak at CBS, Disney and News Corp.--reflecting the writers' strike, pullback in ad spending and consumer-related declines. Cable networks continue to be media's strongest suit.
NBCU's weaker-than-expected results are a "negative read-across" for all TV station owners, broadcast networks and media conglomerates, according to Bernstein Research analyst Michael Nathanson. Recent reports suggest that News Corp.'s Fox Interactive Media will miss its $1 billion revenue target for fiscal 2008, and Time Warner's AOL will continue to see advertising weakness.
Expectations of analysts are fluid and diverse. Many expect pure-play CBS to be hammered the worst this year, with only stronger outdoor returns to barely balance lower traditional media performance. This will be exacerbated by a closing of as much as a 17% "reality pricing gap" between the broadcast networks' double-digit ratings decline and advertising revenue growth, which has been bolstered by high per-unit pricing that has been artificially boosted by tight ad inventory, Nathanson says. That downward trending and the negative impact of a recessionary economy are not being offset by usual quadrennial-year benefits.
But there is hope. Lehman Brothers analyst Antony DiClemente on Friday modestly increased his fiscal second-quarter earnings estimates for Walt Disney's film studios, ESPN and broadcasting; and lowered them slightly for Disney's theme parks. NBCU's theme parks performed slightly weaker than expected in March. Although other analysts also remain bullish, especially on Disney and News Corp., there is increasing concern that the next two quarters will fully reflect the impact of shifting advertiser and consumer spending.
The prevailing view is that the reality of recession, downward adjustments in advertising-based media and the shifting of value in the digital marketplace have not yet caught up with media company forecasts. They are only beginning to be reflected in media company financial statements and executive comments. Morgan Stanley analyst Ingrid Chung several weeks ago adopted six-month stock price targets (rather than the traditional 12-month) for large-cap entertainment companies to better reflect the impact of the recession; she immediately lowered those 10% across the board.
Chung said it will take one to two quarters before large entertainment company balance sheets reflect the negative impact of the recession and the broader ad slowdown. "The main risk in the interim is the perception of a strong upfront in May and June" and what may occur if robust spending at higher prices does not materialize, she said. Wrestling with outdated expectations and new truths may prove the most dangerous of reality gaps for media companies this year.