Barclays upgrades entertainment sector

Analyst ups to "neutral" on economy; boosts CBS, Viacom

NEW YORK -- Barclays Capital analyst Anthony DiClemente chimed in on the ongoing Wall Street debate over the outlook for entertainment stocks with a big call Friday.

He upgraded his entertainment sector view to "neutral" from "negative," citing signs that the worst of the recession may be over and arguing that investor concerns over technological and other secular challenges will be outweighed by recovery momentum.

"Consensus rule of thumb is that an upturn to positive advertising growth happens two to three quarters after the end of a recession," he said in a report published Friday. "But in light of their historically depressed valuation multiples, we think media stocks will anticipate this recovery."

Despite a strong runup over the past couple of months, "media stocks are inexpensive relative to the market and other U.S. consumer discretionary stocks, and we can no longer justify that discount, especially for cable TV business models which are a larger part of media profits (about 60% of the total) than ever before," he argued.

Using price/earnings ratios, media and entertainment stock trade at a 24% discount to the U.S. consumer discretionary sector and an 18% discount to the S&P 500, according to the analyst.

In July, DiClemente had downgraded the sector due to "structural concerns for the movie/TV studios as well as a deteriorating economy." But things have changed thanks to signs of a stabilizing economy and advertising market.

"We now find ourselves at an inflection point," he said Friday. "A cyclical recovery for U.S. advertising will serve as an offset to well-known structural concerns in 2010/11."

DiClemente upgraded shares of Viacom Inc. to "overweight" and shares of CBS Corp. to "equal weight," while reiterating his "overweight" ratings on both Walt Disney and Discovery Communications, which remain his favorite sector stock.

The Barclays analyst also raised his target prices on Time Warner, News Corp. and Scripps Networks.