Be picky if eyeing Europe's media sectorAre you ready to ride the globalization wave and make some European media stock plays? If so, be sure to do your research and be very selective, UBS said in a report last week.
"We believe that divergence among subsectors will persist and that a 'stock-picking' approach remains key for 2007," the UBS European media research team concludes in the report.
Analysts predict advertising and consumer spending will remain lackluster and that, for many sector players, "avoidance of technological risk remains on the agenda."
The team also believes "excess cash" will continue to drive dealmaking in the media and entertainment industry. "Buoyant levels of (mergers & acquisitions) are unlikely to abate in 2007."
Share prices are "likely to be supported by a 3.5% dividend yield and ongoing M&A," plus "European media continues to trade at a significant discount to the U.S.," the UBS researchers say in their report, pointing to a 26% valuation gap between the continents based on '07 estimated price-earnings ratios.
Among the UBS team's key media and entertainment stock picks are U.K. satellite TV giant BSkyB, controlled by News Corp., and German pay TV firm Premiere.
"The significant re-rating of U.S. pay TV names over 2006 suggests upside for BSkyB and Premiere," according to the UBS analysts. Indeed, U.S. cable and satellite stocks had a strong year.
UBS currently has a ?15.50 price target on Premiere and, as in the case of BSkyB, a "buy 2" rating.
UBS also is bullish on the outlook for media and telecommunications conglomerate Vivendi, even though it already was "one of the top 10 performers in the media sector" last year. Not only does the company continue to look like an attractive buyout target, it also is likely to see upside in its pay TV operations after the merger of Canal Plus and TPS, according to UBS. The firm carries a "buy 1" rating and a ?34 price target on Vivendi's shares.
The investment bank's analysts also upgraded shares of music major EMI Group to "neutral 2" from "reduce 2" status and boosted their price target on the stock somewhat. They cited a 50% chance of a sale of the company to the Warner Music Group or other potential buyers, such as private equity firms.
UBS struck a sour note when discussing U.K. broadcaster ITV Plc., on whose stock it has a "reduce 2" rating. Amid continued ad and ratings challenges, "downside risk to the near-term earnings base remains," the team said in warning investors to stay away from the stock.