Commentary: Surprises in showbiz stocks

WMG is up, Cinemedia is down

The first half of the year provided some surprises, chief among them that Warner Music Group, which plays in what's considered a troubled and declining industry, was the second-best performer among the stocks that make up The Hollywood Reporter Showbiz 50 index.

For the index on the whole, just 11 stocks moved higher in the first half of the year that ended Monday, while 39 moved lower. Overall it was off 15%, underperforming the Dow Jones Industrial Average, which lost 10% suffering what Reuters called the Dow's "worst half since 1970."

The Showbiz 50 also underperformed the Nasdaq and S&P 500, which each fell 14% in the first half.

But almost inexplicably WMG pressed on, acting more like a large energy conglomerate than a small-cap music company.

WMG rose 20% in the first half of the year, and if it didn't have such a rotten last four days of trading leading up to Monday it would have been up 36%, rivaling Take-Two Interactive Software for the Showbiz 50's top spot.

But Take-Two operates in a fast-growing industry unencumbered by a game-changing service called iTunes, so the rise in its stock was more predictable. Plus, it had the assist of a takeover offer from rival video game maker Electronic Arts.

Matching WMG's first-half gain was Marvel, which is batting a thousand with two huge hit movie hits on its hands and also was an easier call than was Warner Music.

At the other end of the scale was National CineMedia, one of the two leading companies putting advertising in theaters and on movie screens, which is supposed to be a growth business. Nevertheless, shares fell 57% in the first half, making it the worst stock on the index. It was followed by a couple of radio stocks: Cumulus Media, down 51%, and Entercom Communications, off 46%.

Cumulus, at least, has a semi-legitimate reason for its rapid decline: a deal to take it private for $1.3 billion, or $11.75 per share, finally collapsed in May, 10 months after it was announced.

That drop, while painful, is at least understandable. Not so with National CineMedia, which offered up disappointing second-quarter financial results and weak guidance despite bullish industry trends.

According to the most recent data from the Cinema Advertising Council, revenue in the industry grew 19% last year to $540 million. That kind of growth encouraged many analysts to stick with National CineMedia.

JPMorgan's Barton Crockett, for example, says that the company could merge with ScreenVision, its privately held competition. He also sees a good boxoffice in the fourth quarter that should lift theater-related stocks in general.

Likewise, Wendy Walker of Argus has a "buy" rating on National CineMedia and $28 price target, calling competitive pressures that hurt the company in the second quarter "near-term issues."

As for the three biggest Showbiz 50 gainers, the consensus on Wall Street is that they'll keep gaining -- even WMG.

One of the most bullish analysts on Warner Music is Jason Bazinet of Citigroup, who is predicting a $13 price in the next 12 months.

"We can't find a single investor that thinks the digital transition is a positive for the industry," Bazinet told clients two months ago. He added, though, "We think the Street got too bearish on the long-term prospects of the music industry."

As for Marvel, it's probably the simplest story to understand: "Iron Man" and "The Incredible Hulk."

"With 'Hulk' behind Marvel, the next 18 months are a process of reaping what the company has sown and preparing for the next two releases in 2010," says RBC Capital Markets analyst David Bank, who upped his target price on shares last week from $37 to $43. Marvel has "Iron Man 2" and "Thor" in 2010 and "The Avengers" in 2011, not to mention the DVD releases of "Iron Man" and "Hulk" and related toys to drive earnings.

Its continued out performance, though, isn't a given, and there are a host of analysts who disagree with Bank. Marvel stock, says Miller Tabak analyst David Joyce, for example, "has possibly done the best it can for a while."