Fitch Ratings says that its 2012 outlook for the US Media & Entertainment sector is stable. The outlook for the coming year driven by modest growth in ad spending amid elevated macroeconomic risk, and bolstered by a banner year for political advertising.
“Media conglomerates’ diversity and exposure to cable networks will provide stability and cash flow,” the debt ratings agency said. “High margins and low capital requirements should continue to drive robust free cash flow (FCF). This provides significant cushion to withstand potential economic pressures, and cash generation is expected to be positive even in the event of a materially weaker operating environment.”
Media credits are currently well positioned within their ratings categories, Fitch said of the debt it rates in the sector, and they face minimal to modest near-term maturities. “Share repurchases and potential small M&A activity are likely to exceed or at least equal cash generation. To the extent that leverage remains within Fitch’s targets, a moderate amount of debt-funded activity is incorporated into ratings,” the report said.
What about a worst-case scenario? “While Fitch is not currently forecasting a double-dip recession, should one occur Fitch believes that ad spending in 2012 could decline substantially more than GDP. Margins would contract materially given high fixed costs; however, FCF should remain positive. Credits more at risk in this scenario include those that face higher advertising exposure, are faced with significant secular challenges, or are positioned lower in their rating categories. Additional negative ratings actions could result if cash returns to shareholders remain aggressive in such an environment,” Fitch stated.
Fitch also expects over-the-top (OTT) technologies will remain largely incremental and not drive widespread cord-cutting in 2012. Tablet adoption will further disrupt traditional book, magazine, and newspaper publishers, but over the medium term, it should strengthen their overall profitability. Video content on tablets is expected to remain largely incremental and benefit content providers and aggregators, Fitch said. “The ability to aggregate large audiences will keep traditional media players relevant,” it added.
