Entertainment Stocks Outperform Broader Markets Through Three Quarters

Comcast is the leading stock among Hollywood conglomerates after the first three quarters of the year, finishing Friday's last trading session 52 percent above where it had ended 2011.

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Walt Disney, News Corp., CBS and Time Warner also have been flying high, up 39.4 percent, 37.4 percent, 35.2 percent and 28.1 percent, respectively, at the end of the third quarter of trading. Viacom, up 18 percent, also is outperforming the S&P 500, which was up 14.6 percent.

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The laggard was Sony, which has fallen 35.1 percent through three quarters.

Analysts say that the gains of entertainment giants have not so much been driven by increasing earnings expectations, as in the past, but confidence that new revenue streams — including retransmission fees and distribution deals from the likes of Netflix and Amazon.com — are increasing the value of Hollywood’s content companies.

As of Friday, the most valuable conglomerate is Comcast with a market capitalization of $95.7 billion. Second is Disney ($93.8 billion), followed by News Corp. ($58.7 billion), Time Warner ($43 billion), Viacom ($27.6 billion), CBS ($23.3 billion) and Sony ($11.7 billion).

The valuations still significantly lag the two primary tech-centric media companies: Apple has risen 65 percent through the first three quarters and sports a market cap of $625.4 billion while Google has risen 16.8 percent and has a market cap of $246.8 billion.

One question some on Wall Street are now asking is whether there is more room for growth in Hollywood conglomerate stocks and which ones have the most upside.

Cowen & Co. analyst Doug Creutz said late this week in a report that News Corp. is a “favorite big media name,” citing "an attractive sum-of-parts valuation ahead of the planned split of the company's publishing business from its entertainment divisions."

News Corp., said Creutz, “can outperform the market by 20 percent over the next 12 months."

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Meanwhile, Canaccord Genuity analyst Tom Eagan recently raised his price target for Comcast to $42, arguing that it not only has the "best cable fundamentals" but also "upside with NBC Universal."

In early September, UBS analyst John Janedis upgraded Time Warner from "neutral" to "buy," citing "better stability/visibility" of its earnings trends.

He also boosted his price target on the stock from $39 to $50. "We believe the company’s earnings will be more stable and predictable going forward, benefitting from the upcoming affiliate fee cycle — starting in 2014," Janedis wrote in a report.

And Susquehanna International Group analyst Vasily Karasyov recently suggested that with the Federal Reserve looking to further stimulate the U.S. economy, "Viacom and Time Warner look best positioned this time."

Even CBS Corp., despite its a run-up last year and so far this year, could see its stock go higher, according to Davenport & Co. analyst Michael Morris.

The stock is "still a great value given leverage provided by [its] massive audience," he said. Recent retransmission agreements and an affiliate station agreement further highlight its value, he argued.

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Meanwhile, in a rare recent downgrade, Evercore Partners analyst Alan Gould lowered his rating on Viacom's stock from "overweight" to "equal-weight," cutting his target price by $2 to $55.

"We are lowering our estimates as ratings continue to disappoint," he said. Other big movers during the quarter were Carmike Cinemas (up 64 percent), Time Warner Cable (up 53 percent) and Discovery Communications (up 46 percent). A losing sector so far this year is video games.

Electronic Arts has fallen 38 percent, THQ is off 51 percent, Take-Two Interactive Software is down 23 percent and Activision Blizzard is off 7 percent. Social-gaming company Zynga has fallen 70 percent so far this year.