Media conglomerates endure a tough Q2
All sector biggies but Viacom drop below 2009 closeNEW YORK -- Despite a strong upfront advertising market, big media and entertainment stocks lost ground -- and billions in stock market value -- in the second quarter amid broader market declines since May induced by concern over weak economic growth and European debt fears.
After setting 52-week highs late in the first and early in the second quarter, all sector biggies with the exception of Viacom find themselves below their 2009 close after stumbling to the midyear mark with further declines.
It marks a stark contrast from the end of the first quarter, when Sony led the entertainment conglomerates with a 32.1% year-to-date improvement.
The market lost about $1.6 trillion in value during the quarter, as measured by the Dow. The index dropped 364 points Tuesday and Wednesday, punctuating a 10% tumble in the three-month period.
As second-quarter trading ended Wednesday with a thud, only Viacom was clearly outperforming the S&P (down 7.6%) and its peers with a gain of 13.2% year-to-date.
Meanwhile, the fortunes of smaller film companies have diverged.
After a good start into 2010, DreamWorks Animation has lost ground after disappointing opening weekends for "How to Train Your Dragon" and the fourth "Shrek" installment. Shares were off 28.5% year-to-date as of Wednesday's close.
However, Lionsgate, which has been embroiled in a battle with dissident shareholder Carl Icahn, is up 20.1% year-to-date.
The biggest distributor stocks -- Comcast and DirecTV -- have benefited from their stable subscription revenue (despite Comcast's risk of the NBC Universal acquisition), with both slightly up for the year.
A debate over the direction of media and entertainment stocks began brewing on Wall Street in April, with some arguing shares of many big industry players had appreciated too much amid the economic and ad recovery.
"The stocks have already begun to fall, and all are to be sold," often-bearish entertainment analyst and investor Hal Vogel told THR. "At the least, don't even think of buying them" -- not until late this year or 2011, he said.
Others hope for a temporary blip. "Stocks are down considerably on weak consumer sentiment readings and Chinese growth decline forecasts," Miller Tabak analyst David Joyce said. "We continue to like companies with greater exposure to dual and/or consistent revenue streams."
His favorite stocks in descending order are News Corp. ("which, if successful with acquiring the rest of BSkyB, could be an outperformer in the group," according to Joyce), Discovery, Disney and Time Warner, followed by cable stocks and Viacom.
As of midyear, Disney remained the entertainment conglomerate with the largest market capitalization ($61.7 billion), according to Bloomberg. Time Warner ($32.95 billion) overtook News Corp. ($32.9 billion), and Sony fell to $26.8 billion.
The year-to-date decliners among sector biggies have recently earned some Wall Street support; CBS saw several analysts edge up their earnings estimates.
Barrington Research analyst James Goss cited a strong upfront and reaffirmed his positive stance on the stock, arguing that "our view is further reinforced by recent stock price weakness despite continuing positive fundamental trends."
Joyce also reiterated his "buy" on CBS shares and his one-year price target of $18 after fine-tuning his financial estimates "to reflect continued strong second-quarter ad buying at the local level despite high unemployment levels."
News Corp., meanwhile, has felt some pain from its move to acquire the 61% of BSkyB that it doesn't yet own, which will delay potential stock buybacks.
Barclays Capital analyst Anthony DiClemente recently estimated News Corp. shares are worth $18, arguing that "the consolidation of BSkyB would provide News Corp. with a more reliable subscription (operating cash flow) stream."
BTIG analyst Richard Greenfield this week expressed support for Disney.
"Over the past month and a half, content strength across Disney (from ABC to studio hits like 'Alice in Wonderland' and 'Toy Story 3') has increased our confidence in our above consensus fiscal 2010 earnings per share estimate," he said, leading him to bump up his fiscal 2011 estimate.
Goldman Sachs analyst Drew Borst on Wednesday cut his Time Warner rating from "buy" to "neutral" with a $37 target price, saying Disney and News Corp. look like better bets.