Wall Street throws cold water on the media sector

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NEW YORK -- "Neutral," "market perform" and in some cases even "sell" ratings lately have become more prevalent among media and entertainment analysts.

With the market's steep run-up during recent months and few signs of a quick economic or advertising-market recovery, fewer stocks are seen as having room to grow. Such phrases as "fairly valued" and "market inefficiency" have peppered reports from Wall Street's industry experts this earnings season. Even the downgrade has become a weapon of choice.

UBS analyst Michael Morris said Aug. 10 in an investor note that "advertising stability and cost reductions were the two key themes from second-quarter earnings," which of late have helped drive up sector stocks more than the broad-based S&P 500.

But with the fuel of earnings season exhausted, he predicted that media and entertainment stocks might run out of steam in the near term. "The risk-reward for media shares is significantly less attractive now than it was in late May," when the S&P 500 was well ahead of the sector year-to-date, he said.

No wonder, then, that Sanford C. Bernstein analyst Michael Nathanson warned after News Corp.'s quarterly earnings report that the conglomerate's stock "feels a little ahead of itself." In maintaining his "market perform" rating, he said, "News Corp. appears to be anticipating a recovery that might be slower than currently anticipated."

For those reasons, analysts recently have hit sector stocks with downgrades. Caris & Co.'s David Miller lowered his CBS rating to "sell" after the stock gained significantly following an earnings report in line with expectations (but followed by a conference call bullish on advertising). He argued that the bounce brought CBS' trading multiple "eerily

in line" with those of Disney and Time Warner, both of which are much less ad-reliant.

Meanwhile, Miller Tabak analyst David Joyce downgraded not one but many sector biggies after their earnings reports, moving each from "buy" to "neutral."

Discussing CBS, he mentioned its "rapid run-up past our $11 short-term target price post-second-quarter earnings. We believe CBS stock to be fairly priced in the near term and would await further positive economic and consumer data in (the) coming months as catalysts." He mentioned similar motivations for Viacom, Disney and News Corp. Or, as he summarized in one report, "We would expect more trading-range-type activity in advertising-reliant media stocks as their rebound has perhaps temporarily outpaced fundamental improvement."

Even smaller players without ad exposure, like digital audio technology firm DTS, have heard the downgrade call because of a recent growth spurt. Barrington Research analyst James Goss recently reduced his rating on

the firm's shares to "market perform," noting that "DTS has enjoyed a very strong run." Although he still likes the company's long-term story, he said he wants to take a "more cautious" stance for now.

Last month, Wedbush Morgan Securities analyst Michael Pachter lowered his rating

on DVD-by-mail pioneer Netflix from "outperform" to "neutral" because "we believe that its shares are approaching full value."

That said, analysts are recommending select media and entertainment stocks.

Morris predicted "relative outperformance" during the next 12 months for shares of his "buy"-rated conglomerates Time Warner, Disney and CBS, whose multiples are below those of the S&P 500.

Miller early this month upgraded Marvel Entertainment shares to "above average," arguing it was "a call on earnings power for 2010."

One of the Street's most popular media stocks remains Discovery Communications, which earns "outperform" or "buy" ratings from

the likes of Goss and Joyce. Even here, though, valuation has come more into focus. Barclays Capital analyst Anthony DiClemente likes the stock, which he continues to rate "overweight."

"Fundamentals for Discovery remain strong relative to our coverage universe as Discovery is the only company growing (operating cash flow) at a double-digit rate," he said, boosting his price target to $26 after the firm's latest earnings report. "At this point, after a strong and steady run, valuation remains the lone concern."

But Nathanson already has used a "market perform" rating on Discovery, arguing that the shares are "fairly valued relative to the near-term revenue outlook, which includes a rather uncertain domestic ad environment." Or, to use the title of his report, "You get what you pay for."

So media and entertainment stocks might take a breather for a while, but signs of real economic and ad recovery could provide renewed growth. In a note a few days ago, Morris said valuations based on 2009 and 2010 price/earnings multiples for the overall media sector remain below those of other consumer discretionary investments.

"Media companies remain an attractive cyclical investment relative to other consumer discretionary opportunities," he said, with upside "even (in) a modest recovery."
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