Lionsgate Among Analysts' Hollywood Stock Picks for 2013
Wall Street observers also mention AMC Networks, Discovery Communications, CBS Corp. and Time Warner as big entertainment industry stocks with upside.
Lionsgate is among analysts' big entertainment industry stock picks for 2013 despite an approximately 90 percent gain in 2012.
Ahead of the start of the new year, Wall Street observers surveyed by THR also mentioned the stocks of cable networks companies AMC Networks and Discovery Communications, as well as conglomerates Time Warner and CBS Corp. as bets that could yield upside for investors in 2013.
"My favorite going into next year is Lionsgate," Cowen & Co. analyst Doug Creutz, who has an "outperform" rating on the stock, told THR. He expects the studio to continue to benefit from the Summit acquisition and the Hunger Games franchise, whose second is due in 2013, even though the company will miss recent hit franchise The Twilight Saga.
"And their TV business is still growing," Creutz said, highlighting the recent success of Anger Management, starring Charlie Sheen. The TV arm of Lionsgate has also been developing a George Lopez sitcom.
With the economic outlook still uncertain, Lionsgate has an advantage over other entertainment companies, the analyst argued. "They don't have exposure to advertising, and it could be a weak ad year, which could restrain growth rates of big network companies," he said. "There are a lot of questions about the macro economy. But we continue to see the value of content go up. Fundamentals of the space for next year look like this year, so companies with strong content can get more for it."
Wunderlich Securities analyst Matthew Harrigan also called Lionsgate his favorite studio name for 2013. "They have an ample pipeline after Hunger Games," he said. "Their TV [business is] smaller, but strong with Mad Men, Nashville, Anger Management etc." Overall, he said Lionsgate is "really becoming a cost conscious major."
While some on Wall Street worry about economic and ad trends in 2013 and how they will affect TV networks groups, others are bullish on a couple of independent cable networks firms.
Sanford C. Bernstein analyst Todd Juenger recently highlighted Discovery Communications as his top stock pick for 2013 with an "outperform" rating and boosted his target price to $70 despite the stock's strong gains in 2012 that made it one of the year's best-performing media and entertainment industry stocks.
"Discovery remains our top idea, because it lines up best against the key industry drivers: affiliate fees, cost structure, international and advertising," Juenger wrote in a report. "Bears point to risks that affiliate fees will slow, costs will accelerate, and Discovery's competitive advantage will erode over time. We believe Discovery has a strong affiliate fee story, insulated costs poised to decline in 2014 and a defensible position."
Lazard Capital Markets analyst Barton Crockett is also one of the Wall Street observers with a "buy" rating on Discovery. His price target even stands at $77.
He lauded pre-Christmas deals in Europe to acquire ProSiebenSat.1's Scandinavian TV business and a stake in Eurosport owner TF1. "Discovery is an investment in the world's most successful non-fiction TV content creator, anchored by flagship networks Discovery and TLC, and bolstered by emerging networks Discovery ID and OWN," Crockett recently wrote. "Discovery offers peer-high exposure to secular expansion of subscription TV outside the U.S., fueled by comparatively low cost content that is exportable globally at high margins."
AMC Networks is a smaller cable channel group that some analysts expect to see stock gains in 2013.
Davenport & Co. analyst Michael Morris said in a year-end report: "We continue to view AMC Networks as the best idea in media. We believe that consensus estimates under-appreciate the affiliate and ad revenue growth opportunity at the company."
Maintaining his "buy" rating on the stock and a $51 price target, he added: "The company’s profitability and cash flow generation remain underappreciated, and that management has a clear focus on re-investing that cash into its content and networks. The success of that investment will ultimately determine value, but we believe that the market is assigning little, if any, probability to incremental success of programming investment, creating an attractive buying opportunity."
Susquehanna Financial Group analyst Vasily Karasyov also likes AMC Networks' outlook and sees it as a potential acquisition target. He uses a $61 price target and has "positive" rating, which is similar to a "buy," on the stock.
Of course, other analysts also have other stock suggestions for 2013, including entertainment conglomerates CBS Corp. and Time Warmer, which have provided a return of more than 30 percent to investors over the past year, according to Bloomberg data.
RBC Capital Markets analyst David Bank told THR that CBS provides the best earnings "beat and raise" possibility going into 2013. He cited the company's "digital content dry powder (prior seasons of current shows) that is untapped, retrans ramping and potential to increase return of capital."
UBS analyst John Janedis, meanwhile, called Time Warner his most preferred industry stock with a "buy" rating and $50 target price. "We believe TW shares are in the early stages of a two-plus year cycle of peer group outperformance," he said.
He sees upside driven by upcoming cable TV networks carriage fee renegotiations, "an upswing in ratings benefitting from improved programming" and "multiple expansion driven by improved earnings growth and stability vis-a-vis peers." Added Janedis: "We expect positive earnings revisions for Time Warner over the next several quarters, as the Street better appreciates the earnings potential."
Wunderlich analyst Harrigan said he also likes a big film exhibitor stock, Cinemark, for 2013. He has a "buy" rating on the stock and on Monday called it his "top 2013 entertainment idea." Said Harrigan: "We estimate that Cinemark's price now discounts 5 percent U.S. annual attendance per screen contraction and (unlikely) flat Latin American attendance per screen over 2013-2017."