Investors fear Seven's star is fading

INVESTORS savaged Seven West Media shares, forcing the group's share price 22.8 per cent lower yesterday after an unexpected profit downgrade Tuesday night prompted a swathe of downgrades by analysts.

By InvestSMART · 27 Apr 2012

By InvestSMART ·
27 Apr 2012

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While Seven has outfoxed Nine and Ten in both ratings and advertising share in the past year, the market was shocked by the extent of the extra costs of its programming and expressed fears that Nine's ratings phenomenon The Voice might mark a dimming of Seven's dominance.

After falling 16 per cent when the market open, Seven West shares slid further in the last hour to end the day 86? lower at $2.91, levels last seen in October 2011. It was the first trading day since an earnings downgrade on Anzac Day eve.

The lower than expected full-year earnings forecast of $460 to $470 million could drive up the group's gearing levels, a Goldman Sachs analyst, Christian Guerra, warned.

Seven sources denied speculation that any advertisers had sought "make goods" - extra advertising slots - after the success of The Voice led to poorer than expected showing for some of Seven's programming.

A Morgan Stanley note to clients said: "A number of its major shows which go head-to-head with The Voice have viewers down a hefty 30 per cent to 40 per cent on previous corresponding periods, for example Dancing with the Stars (1 million versus 1.5 million), Australia's Got Talent (1.1 million v 1.6 million), Packed to the Rafters (1.1 million v 1.8 million). If viewership levels don't recover, advertisers may seek to be made good. That would hurt Seven's ad market share."

In downgrading Seven West, Morgan Stanley warned the group had "very high operating leverage" and "high financial leverage ... which leaves it vulnerable to a prolonged downturn in advertising markets and/or sudden shifts of TV market share against it". Nevertheless, Channel Seven has an advertising share of about 40 per cent, compared to Nine's nearly 32 per cent and Ten at 28 per cent.

Elsewhere in the media sector, Fairfax Media shares fell 2? to 70?, the Ten Network fell 0.5? to 81?, News Corp shares rose 2? to $18.90, and APN fell 2? to 80?.

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Frequently Asked Questions about this Article…

Why did Seven West Media's share price fall sharply?

Seven West Media shares plunged after the group issued an unexpected profit downgrade. The stock fell about 22.8% on the day, dropping sharply at the open and finishing the session at $2.91, as analysts reacted to higher programming costs and weaker-than-expected earnings guidance.

What was in Seven West Media's profit downgrade and earnings forecast?

Seven West Media cut its full-year earnings outlook to roughly $460 million–$470 million. The downgrade cited extra costs tied to programming, which prompted analysts to lower forecasts and raise concerns about the group's financial position.

How has competition from Nine's The Voice affected Seven's TV ratings and advertising?

Analysts noted several of Seven's major shows that go head-to-head with The Voice are seeing viewership drops of around 30–40% versus prior corresponding periods. Examples cited include Dancing with the Stars (about 1.0m vs 1.5m), Australia’s Got Talent (1.1m vs 1.6m) and Packed to the Rafters (1.1m vs 1.8m). Lower ratings can reduce advertising effectiveness and put pressure on ad revenue.

What are 'make goods' and could they hurt Seven West Media's advertising revenue?

Make goods are extra advertising slots offered to clients if a campaign underperforms. The article notes speculation that advertisers might seek make goods if viewership doesn't recover, which Morgan Stanley said could hurt Seven’s ad market share. Seven has denied that advertisers have sought make goods so far.

What did analysts at Morgan Stanley and Goldman Sachs warn about Seven West Media's financial risk?

Morgan Stanley warned that Seven has 'very high operating leverage' and 'high financial leverage,' leaving it vulnerable to a prolonged downturn in advertising or shifts in TV market share. Goldman Sachs analyst Christian Guerra warned the lower earnings forecast could push up the group's gearing levels.

How large is Channel Seven's advertising market share compared with its rivals?

Despite the downgrade, Channel Seven still held an estimated advertising share of about 40%, compared with nearly 32% for Nine and around 28% for Ten, according to the article.

What should everyday investors consider after Seven West Media's downgrade?

Investors should weigh the earnings downgrade, higher programming costs, potential for increased gearing, and vulnerability to shifts in TV viewership and advertising markets. Analyst downgrades and the risk of advertisers seeking make goods were highlighted as near-term risks that could affect revenue and share performance.

How did other media stocks react to the news about Seven West Media?

The wider media sector saw mixed moves: Fairfax Media shares fell about 2%, the Ten Network fell around 0.5%, News Corp shares rose about 2% to $18.90, and APN declined roughly 2% on the day mentioned in the article.