Ad rebound means Street won't have CBS Corp. to kick around anymore

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Just in time for summer, Wall Street has started to warm up to shares of CBS Corp. and a few other media and entertainment conglomerates.

MCBS has been out of favor with Street observers for more than a year and, thanks to its advertising exposure, has been the hardest-hit major media conglomerate stock during the longest U.S. recession since the Great Depression.

But with CEOs of sector biggies speaking during recent quarterly earnings calls of stabilization in the ad market, several analysts have identified CBS shares as a key momentum play as the economy moves toward a recovery, even if they continue to discount the longer-term growth potential of its traditional media assets.

UBS' Michael Morris, for one, upgraded CBS shares Friday from "sell" to "buy" and boosted his price target from $3.80 to $9, saying the stock has the "most attractive risk-reward in media" even though it already has moved higher since March.

CBS shares declined 90% from their peak valuation in 2007 to their trough in March, and they remain 77% below their peak, he says.

"With about 65% of its revenue from ads, we forecast that CBS will see the largest peak-to-trough earnings decline in our media universe," Morris says. "However, at this point, negative sentiment has driven consensus earnings estimates to reflect little to no ad improvement in 2010, yielding an attractive entry point even after the recent rally."

Morris downgraded the stock in March, but advertising and credit momentum have stabilized, he argues, and he highlights big upside. "Even after the recent appreciation in the shares, we see material upside potential in even a modest cyclical recovery," he says. "Note that CBS shares remain 77% below their October 2007 peak levels, and even our upside 2010 earnings-per-share scenario of $1.15 is 39% below the 2007 level."

Also boosting the UBS analyst's comfort level is the upfront ad market, in which he expects the CBS broadcast network to maintain a firm position on pricing after recently strengthening its balance sheet.

"Previously we had concerns that CBS could feel pressure to provide price cuts given concerns around near-term debt maturities," he says.

Barclays Capital analyst Anthony DiClemente also reiterated a bullish take on CBS last week. "Of any company in entertainment, CBS stands to benefit most from an advertising stabilization and recovery," he says.

In mid-May, DiClemente boosted his rating on CBS shares to "equal weight" and price target by $4 to $9 because of improving economic and ad trends. "CBS is a leaner company than it was last summer, given several rounds of cost cuts and restructurings that provide increased operating leverage when the advertising revenues return to the business model," he says.

Other analysts also recently updated expectations for CBS. In early May, Miller Tabak's David Joyce reiterated his "buy" rating and raised his target by $3 to $11, and Wunderlich Securities' Martin Pyykkonen boosted his target by the same amount to $8.

The expected economic and ad recovery has led to a recent rally for media biggies, and investors are trying to filter which other major sector players have upside left as a potential rebound looms.

Morris tried last week to provide investors with a little beach reading in the form of a report titled "How to Spend Your Summer: Media Investing in a Stable Environment."

To build a media-stock portfolio with a balance of near- and long-term opportunities, he suggests investors buy shares of Disney, Time Warner and CBS -- in that order. CBS is a near-term momentum play, and Disney and TW are "investor-friendly, long-term growers that remain attractively priced," Morris says.

His review of the media-stock universe also is instructive. It declined 66% from its October 2007 peak to its March trough. "The recent recovery has lifted the space 61% off its lows, but valuations remain nearly 50% below peak values," the analyst says.

Beyond CBS, other sector biggies have garnered upgrades amid economic recovery hopes.

Last month, DiClemente upgraded Disney and Viacom to "overweight." He called Disney a "best-in-class global entertainment company" that is "best-positioned for media's digital evolution" and predicted that many of Viacom's recent cost cuts are permanent, "so when the economy cyclically rebounds, margins are likely to benefit."

So, to add fun and sun to one's stock portfolio this summer, some media biggies might be worth a look. But keep an eye on economic and ad-market trends to avoid a rude awakening in case the media rally goes too far and it starts raining again.
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