The Midyear Showbiz Stock Report

Taylor Hill/Getty Images; MP17/MPI/PictureGroup; Peter Mountain/Disney; Melinda Sue Gordon/Warner Bros.

Who's winning in 2011 so far? Hint: The studios have a reason to smile.

Hollywood, it turns out, isn't such a bad place to invest these days. With the midyear mark looming, The Hollywood Reporter's analysis reveals that the big entertainment stocks are up year-to-date and are outpacing the broad-based S&P 500 index, continuing trends seen in 2010 and even 2009. "The good ad market and a conversion ratio for home entertainment that is still lousy but stabilizing" are among the reasons investors have put their money into showbiz stocks, says Wunderlich Securities analyst Matthew Harrigan. "And it appears that studios and [TV distributors] will address digital-distribution issues intelligently." However, after such major sector stocks as CBS Corp., Viacom, Time Warner and News Corp. hit 52-week highs in May and June, they have pulled back in recent weeks amid a more challenging stock climate. This left such names as TW, News Corp. and Disney below their first-quarter closing prices as of press time June 20. But except for Sony Corp., whose American depositary shares have cratered by about a third this year after the Tokyo earthquake and hacker attacks on the PlayStation Network, the stocks of all major entertainment conglomerates are up year-to-date, led -- as was the case last year -- by CBS, followed by Viacom.

The Studio Conglomerates
All of Hollywood's core companies are up except Sony, hard hit by the Japan earthquake and the PlayStation privacy scandal.

Sumner Redstone's CBS Corp. and Viacom are entertainment congloms with the biggest stock gains year-to-date, driven by TV ad growth and strong ratings for shows including CBS' NCIS and MTV's Jersey Shore, Disney’s Pirates of the Carribean: On Stranger Tides and Time Warner's The Hangover Part II have delivered overseas box office. Meanwhile, American depositary shares of Sony are way down after the quake and hacking scandal.

The Indie Studios and Cable Network Groups
DreamWorks Animation sinks on a lack of big hits, and Oprah's OWN is a concern at Discovery

Stand-alone cable networks and film studios had a rough start to 2011. Ratings challenges, such as for Discovery's OWN network venture with Oprah Winfrey and some of Scripps' lifestyle channels, have been a drag. Some disappointing box office for DreamWorks Animation's recent films and home video sluggishness have hurt its stock.

The Film Exhibition Sector
3D woes hit RealD, but some theater owners weather storm

Stocks of movie exhibitors and related companies have been a mixed bag this year. Cinemark, which has a strong Latin American business, and Imax, which has benefited from international and technology trends, are up, while 3D tech provider RealD has been hit by weak box office and 3D fatigue. A decline in moviegoers has been a drag on others, including in-cinema ad firm National Cinemedia.

The TV Distributors
What cord-cutting? All cable and satellite stocks are up

While analysts continue to debate whether online alternatives or simply the weak housing market are the drag on cable-subscriber numbers, satellite and cable TV stocks are up across the board. Satcasters are still gaining subs, and cable companies have been paying dividends. Plus, Comcast's NBCUniversal acquisition, which closed in late January with conditions Wall Street said the company can live with, seems to have gone off smoothly. Dish, whose stock declined in 2010, is one of Hollywood's best performers in 2011.

The Tech Companies
TiVo has been a sleeper hit, while biggies Google,Yahoo and AOL have been under pressure

Showbiz tech companies have been hit-and-miss. Big Internet players Google, Yahoo and AOL are down, while tech-gadget giant Apple has been flat. TiVo's stock has benefited from the settlement of its legal dispute with Dish Network. And Netflix, up a staggering 40 percent to $245.63, is one of the best-performing entertainment stocks of 2011. Could it hit $300 by year's end?

The Industry IPOs
Big launches followed by sobering landings for new stocks

Media and tech IPOs have been inconsistent this year after opening pops. Online music service Pandora's June 15 debut, for instance, saw the stock soar, but it closed below its opening price June 20. May's LinkedIn IPO saw the social networking company skyrocket to $122.70 before recently settling at slightly more than half that.

WHICH STOCKS TO BUY (AND AVOID) RIGHT NOW: Barton Crockett, top analyst at Lazard Capital Markets, gives THR the inside track 

What to buy I have "buy" ratings on Viacom, News Corp. and Time Warner. They are trading at valuations that are near or below the market, and you have earnings growth that is well above the market. That combines for a very interesting investment opportunity. Time Warner and Viacom are getting much better at returning capital to shareholders. If the economy stays OK, you will do well with Viacom. And among small-cap stocks, I think what is interesting right now is TiVo. It is a kind of under-the-radar, forgotten stock. It has emerged as the new answer for mid- to small-size cable and satellite TV companies -- particularly outside the U.S. -- that need a modern interface to compete in the age of Internet video. The stock is pretty cheap, and they have a lot of cash, including what they got in their Dish settlement.

What to hold Disney is a great company. One thing is its valuation has been a little bit richer, and the other thing is that I think that Wall Street was a little bit too ambitious about Disney's earnings prospects. Disney-0wned ESPN is a great business in the U.S. but not as strong an international story as the cable networks at some of these other companies. And ESPN is not growing margins as much as some of the other networks because they have to spend so much on the sports content. Disney at the right price is a stock you want to own, so I am just biding my time. DreamWorks Animation has a problem. The majority of profits at a movie studio come from DVD sales, and right now DVD sales are really the most challenged area. And their most profitable franchise, Shrek, has been winding down, and it is not clear whether newer franchises can fully replace it. Plus, there has been a little bit of disappointment with some of the recent movie performances:- Megamind, Kung Fu Panda 2.

CROCKETT'S HOT PICKS: The analyst recommends what to buy (with price targets) and where to be neutral

BUY

  • Viacom $73
  • News Corp. $26
  • Time Warner $51
  • TiVo $13

HOLD

  • Disney
  • DreamWorks
  • Netflix
  • Cinemark
  • Sirius XM
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