Analysts Debate Entertainment Stocks Ahead of Earnings Reports

With many conglomerate stocks near highs and earnings season kicking into high gear Wednesday, one analyst says "the group should continue to outperform."

Analysts debated the outlook for entertainment stocks early this week ahead of Hollywood conglomerates earnings season, which is set to kick off with a big bang Wednesday.

In an unusual occurrence, four entertainment giants will report their latest quarterly figures on the same day. Viacom, Time Warner and NBCUniversal owner Comcast will post their financials and hold earnings conference calls in the morning, with CBS Corp. scheduled to present its first-quarter results after the market close.

Walt Disney, News Corp. and Sony Corp. will wrap up earnings season by reporting on three separate days next week.

With most of these sector giants' stocks near 52-week or all-time highs - Disney hit one at $63.08 on Tuesday, Wall Street observers said that earnings season will particularly affect investors' near-term view of Hollywood stocks.

"The Results Are Highly Predictable, The Stock Reactions Are Not," Sanford C. Bernstein analyst Todd Juenger entitled his earnings preview this week. "With no operational catalysts, investors have focused on events: CBS Outdoor [conversion into a real estate investment trust], News Corp. split, Time Inc. spin. We think these events are already in the stocks. If media companies print in-line results, how do the stocks react?"

His take: "From a fundamentals perspective, media still looks solid. Valuations are not stretched. Affiliate fees are safe, advertising is "fine." But he does see "looming headwinds - subscription VOD, programming costs, online video ads, but those risks are not imminent, nor catastrophic."

Evercore Partners analyst Alan Gould echoed that notion of possible stock upside.

"The group has dramatically outperformed the S&P 500 the last five years largely driven by their cable network businesses, particularly the recurring and growing affiliate fees, and the shareholder friendly capital returns, which has attracted a wider investor base," he wrote Tuesday. "Given their relatively modest multiples, as long as they continue to grow quicker than the S&P, which we anticipate, then the group should continue to outperform."

Gould raised his price targets on virtually all entertainment biggies ahead of the earnings parade. His largest price target changes were for News Corp., up 30 percent to $39, and Disney, up 17 percent to $68.

"Spinning-off divisions and aggressively repurchasing shares, driven by low interest rates, increases our... valuations," the analyst said. "Our favorite large-cap names are News Corp., based on its higher growth rate and ongoing multiple expansion, and CBS based on the value created from the REIT structure for its outdoor properties."

The key issues he expects Hollywood conglomerate CEOs to face on earnings calls this week and next include:
- "Future growth in digital licensing, particularly in light of Netflix's comments last week" that it would not renew some content licenses.
- Ratings softness, particularly at broadcast, but also cable networks.
- The advertising environment and prospects for the upfront.
- Comments on the Aereo litigation.

Lazard Capital Markets analyst Barton Crockett also predicted quarterly results at the conglomerates in line with Wall Street expectations.

"Viacom looks interesting versus low expectations," he wrote. "Viacom has been written off by many as a secular audience loser. But Nickelodeon is stabilizing after a tough year, and we believe ad revenues are too, with the domestic cable ads likely to be close to flat [this quarter and turning] positive in later quarters."

Crockett echoed his peers in saying there is more upside in big sector stocks. "We continue to see multiple expansion for the group, which is cheap versus the S&P 500," he said. "We believe a solid economy will power healthy ad outlooks, see continuation of secular growth in affiliate fees and solid stock buybacks."

Twitter: @georgszalai