Entertainment stocks rally, analysts upgrade

Stronger-than-anticipated rebound in ads expected

NEW YORK -- The week is ending on a high note for entertainment stocks, with at least two prominent industry analysts publishing bullish reports.

Goldman Sachs analyst Mark Wienkes on Thursday raised his view on the entertainment sector from "neutral" to "attractive."

And Friday morning Barclays Capital analyst Anthony DiClemente published a ranking of his favorite industry stocks that also predicted more upside ahead.

Both argued that despite a rally since March, entertainment stocks remain affordable, and they cited an expected advertising recovery now that the recession seems to be at or near its end.

"A stronger-than-anticipated rebound in national advertising -- a primary driver of fundamentals and sentiment across the group -- is the single most important factor in our updated outlook," said Wienkes. "We acknowledge what we think will be continued weak consumer spending and local advertising trends, but think these will be more than offset by rebounding national advertising, stable affiliate fee growth and solid content trends as secular disintermediation risk remains distant."

Similarly, DiClemente predicted that "a cyclical recovery for U.S. advertising will more than offset media's well-known structural concerns in 2010/2011."

Valuations in the sector are still "attractive relative to historical levels and other market sectors," Wienkes added ahead of next week's annual Goldman Sachs Communacopia media investor conference. And he predicted that entertainment stocks will increasingly reflect fundamentals in a phase of normalization after three "relatively distinct trading stages of 'capitulation,' 'beta rally,' and stabilization."

DiClemente overnight echoed that. "Despite a buoyant summer break and a nice welcome-back rally, the longer view maintains that media stocks are not only "highly torqued" for an economic recovery, but are still generally inexpensive versus the market and other consumer stocks," he wrote in his report.

For example, media/entertainment must still play catch-up to such sectors as retail and gaming, and sector stocks still trade about 10%-15% below their recent historical valuations pre-financial crisis.

Which stocks do the two analysts prefer right now?

Wienkes upgraded Time Warner shares to "buy," saying he likes it and Viacom's stock best.

And DiClemente said as a back-to-school initiative of sorts, his team has created a forced-ranking system as stock-picking within the entertainment and media sector is key after the rally of recent months. His top five stock picks are Walt Disney, Discovery Communications, Viacom, CBS Corp. and News Corp.

While entertainment executives have remained cautious on the outlook for an ad recovery, the Barclays and Goldman analysts see a slow improvement.

Overall sentiment is still improving, DiClemente argued, pointing to reports this week that General Motors would launch a major auto marketing campaign later this month. "That's not just stabilization language, that's recovery talk," he said.

Meanwhile, Cowen analyst Doug Creutz on Friday sounded much more somber notes in downgrading some big entertainment names, arguing that "advertising growth (will) be sluggish at best over the next two years."

He predicted that U.S. ad spending will decline 1.3% in 2010 before finally turning slightly positive in 2011 with a 1.2% improvement.

Creutz downgraded shares of Viacom from "overweight" to "neutral." He also cut CBS Corp. and News Corp. from "neutral" to "underperform."
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