MARKET WATCH : ABC Stock Soars as Network Hustles to Be No. 1

One of the most common refrains heard in savvy media circles is how the three television networks are “dinosaurs,” hanging on for dear life in the face of declining market shares.

So investors might have been a little confused when they saw Capital Cities/ABC Inc. jump $15 a share last week to close at $568, coming within a whisker of its previous 52-week high. Suddenly the market has something it hasn’t seen since a mastodon fell into the La Brea Tar Pits: A hot network stock.

The reason is that Wall Street, which has been cool to much of the media sector for several months because of sluggish advertising forecasts and the debt many of these companies carry, is positively in love with Cap Cities and its low-key management team headed by Chairman Thomas S. Murphy and President Daniel B. Burke.

Analysts now believe that Murphy and Burke have positioned ABC within striking distance of NBC, which has been the dominant network for five years, earning hundreds of millions in profits annually while ABC and CBS have either lost money or barely broken even. But that is changing fast.

Everything at ABC is looking up. But some of its improving picture has less to do with its own gains than with losses at NBC. In the just-concluded 1989-90 television season, NBC’s ratings dropped 9% while ABC’s and CBS’ remained essentially flat. And ABC has gained important ground among the highly desired “key demographic categories” of young men and women, for whom advertisers are willing to pay a premium.

ABC’s advances this past season mirror those NBC made among key segments of the audience in the early 1980s, before it won the overall prime-time ratings for the first time in 1984-85. The difference is that ABC already leads NBC in key demographics during the morning, daytime and news portions of the schedule.

“ABC is closing in on NBC, which is softening,” said David Londoner, senior analyst at Wertheim Schroder & Co. Last year, the ABC television network earned $165 million in operating profit on $2.4 billion in revenue. Francine Blum, Londoner’s associate, expects it to earn at least $265 million before taxes this year. “There is strength in the network marketplace despite the lackluster economy,” Londoner notes.

NBC pulls in 45% of the $9.6-billion pool of network advertising, while ABC has 31% and the balance is shared by CBS and Fox. The pool of advertising dollars has crept up only 1% to 3% in recent years, even falling short of the annual inflation rate of 4% to 5%.

Yet because the networks have relatively fixed costs in any given year and have sold between two-thirds and three-quarters of their advertising time for the season in advance, any increase in ad revenue for the remaining time--sparked by a rise in the ratings or sudden rush of ad dollars into the marketplace--means that much of that gain will flow directly to the bottom line.

“Network TV is not a growth business, but it is a leverage business,” notes Mark Reily of the New York boutique media investment firm of MacDonald Grippo Reily Inc. “Any incremental revenue which is taken in is pure profit. The network is the driving force here.”

Analysts also feel increasingly that network stocks--it’s not possible to buy stock directly in NBC since it is a subsidiary of the General Electric conglomerate--are a better bet than they were a couple of years ago because advertisers are coming back to the medium after experimenting with direct mail, couponing, in-store advertising and other techniques that supposedly drained advertising dollars away from mass media.

Some analysts are even hopeful about CBS Inc., which after selling off its CBS Records and publishing divisions several years ago has nothing left but the network and six owned-and-operated TV stations in major cities. CBS shares lost $1.25 last week to close at $174.50 and is trading as many points away from its 52-week low as Cap Cities is from its high. One worry is that CBS earnings will come under pressure once a new round of expensive sports contracts starts kicking in.

The hopefulness among analysts--optimism would be too strong a word--is because of the record of Jeff Sagansky, the network’s programing chief, who formerly headed Tri-Star Pictures and was second-in-command at NBC Entertainment under master programmer Brandon Tartikoff.

“If (CBS Inc. chief executive) Larry Tisch will leave him alone and if trends develop, chances are in three years CBS will be pushing NBC out of second place.”

ABC, which already has the demographic lead in the less watched parts of its schedule, currently has three of the top-rated programs in prime time: “Roseanne,” “America’s Funniest Home Videos” and “Twin Peaks.” The latter two are only recent additions to the schedule, so their full positive impact won’t be registered until next year.

Cap Cities Chairman Murphy steps down in June and will be replaced by his longtime No. 2 man, Burke. No one expects a radical departure in company style. Wall Street is waiting for another big acquisition on the order of Cap Cities’ purchase of ABC in 1985, perhaps even a Hollywood studio. (The company has $2.5 billion in cash on hand.)

One thing for certain, however, is that analysts feel comfortable enough with the current trend at Cap Cities to boost their earnings-per-share estimates into the high $30s. Chances are this time next year they will be boosting their estimates once again.