Media stocks trail at halftime

First-quarter ills ease just a bit

It was a tough first half of the year for big media and entertainment stocks as economic sluggishness, company-specific concerns and broader market declines -- particularly pronounced in June -- dragged down shares of all sector giants.

All conglomerates except for Viacom hit new 52-week and other lows during the first quarter, while the second quarter saw News Corp., CBS Corp. and Sony tumble even farther.

Viacom also went into free-fall mode and hit new lows during the second quarter, hurt by a cable network advertising revenue warning and concerns about a possible loss of its DreamWorks partnership. It leaves the stock as the biggest loser among sector giants at the half-year point.

Only 10 names on The Hollywood Reporter Showbiz 50 stock index finished first-half 2008 above their 2007 close, led by video game firm Take-Two Interactive, which Electronic Arts has been trying to acquire. Its 39% gain is followed by Warner Music Group and Marvel (up 20% each) and DreamWorks Animation (up 17%).

These and a handful of other gainers helped the THR Showbiz 50 make up a bit of its 17.8% first-quarter decline to end June with a 15.2% deficit. That's still worse than the midyear 12.8% decline in the broad-based S&P 500, which was down 9.9% in the first quarter.

But most entertainment conglomerates are way off year-to-date, although Disney managed to do better than its peers (down 3%) as its theme parks have held up better than some had expected in a sluggish economy.

Many on Wall Street remain skeptical about the sector's near-term outlook, but some say a rebound in large entertainment stocks could start later this year.

Concerns about the U.S. economy, the continuing credit crunch and rising oil and other commodity prices "are sending investors away from consumer discretionary stocks" and advertising-dependent stocks, Miller Tabak analyst David Joyce said.

Added Dennis Leibowitz, managing general partner at media-focused hedge fund Act II Partners, "The maturation of DVD and a projected soft third-quarter boxoffice because of (tough) comparisons are other reasons" for the malaise.

In mid-June, Citi chief U.S. stock market strategist Tobias Levkovich reduced his rating on media stocks from "overweight" to "market weight." His argument: The S&P media index outperformed the S&P 500 early this year, and "media has historically performed poorly during periods of soft consumer confidence." As a result, he sees more upside in transportation, insurance, pharmaceuticals and other industries.

Asked why a weak economy doesn't help entertainment stocks, which often are seen as recession-resistant, he said: "That's already built in to expectations. What you have to do is get beyond the expectations" to gain investors' confidence.

Hal Vogel, president of Vogel Capital Management, also said he is looking to make money outside of entertainment. "Favorable stocks are not in this sector. I'm trading elsewhere," he said. "Cash is a good alternative, too."

The biggest loser on the Showbiz 50 year-to-date is cinema ad firm National CineMedia, which has struggled with near-term challenges.
Certain analysts suggest that some of the big sector losers could bottom out in the coming months.

On June 23, Viacom hit a 52-week low of $30.15, a low for the stock since its split from CBS Corp. in early 2006. It closed slightly higher than that on Monday.

UBS analyst Michael Morris recently pointed out that "Viacom shares now trade at a significant discount to the entertainment industry and the S&P 500," which, he said, should give investors some confidence to buy the stock.

But several analysts -- led by Pali Research's Rich Greenfield, who has suggested this scenario for a long time -- came out during the second quarter arguing that a privatization of Viacom might be the best way to create value for shareholders.

Time Warner was down in the double-digit-percentage range after the first quarter but at the midyear stage recovered a bit, down 9.6% at $14.80. It got a 2.6% boost Monday as Citigroup added its shares to its top picks list, making them the firm's favorite sector choice. Citi analyst Jason Bazinet, who has a "buy" rating and $25 target on TW, cited a possible sale of AOL businesses as a catalyst.

Similarly, late in the second quarter, Greenfield came out in support of News Corp. "While valuation multiples are falling across the media landscape, we believe News Corp. shares are compelling," he said, citing continuing investments in new businesses, such as the Big Ten Network and MySpace.

News Corp. is down 28% year-to-date and set a 52-week low of $15.25 on Monday amid continuing worries about a weak U.S. economy and its impact on the firm's ad revenue.

Vogel predicts big media stocks "will entertain a decent rally sometime before the end of the year." He added, "The bad news is that the rally will, in my opinion, be from lower levels than today."

Joyce and others highlight that media stocks traditionally start a rebound about a quarter before the end of a recession, and large companies tend to outperform then because they are more diversified. Said Joyce: "A second-half (media) rebound is possible but might be optimistic."
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