U.K.'s ITV Among Analysts' European Entertainment Stock Picks for 2013

Regulation Fears Hit Chinese Online Video Giants

Shares in Chinese online video giants Youku and Tudou took a dive this week as the Beijing government cracks down on online video with stricter regulations. The new laws will require Internet video providers to pre-screen all programming before making it available.

Some also like Germany's ProSieben, but observers are more mixed on British pay TV giant BSkyB and French media and telecom conglomerate Vivendi.

U.K. commercial TV giant ITV and German broadcaster ProSiebenSat.1 are among European media and entertainment analysts' key stock picks as 2012 comes to an end and investors look for best bets for 2013.

While major TV network groups across Europe reported mostly weaker ad sales for the third quarter and first nine months of 2012 amid continuing economic weakness, TV production arms have emerged as key growth units. ITV, which has this year acquired several TV production businesses, and ProSiebenSat.1 have seen revenue gains thanks to that.

Observers say that will position them better than some competitors amid a still unclear economic and ad outlook as 2013 is set to start.

UBS analyst Tamsin Garrity has a "buy" rating and $1.78 (1.10 pounds) price target on the stock even though it has been trading near its 52-week high of $1.75. ITV is on UBS' "media most preferred list." Garrity recently also called ITV her "most preferred broadcaster" and has highlighted it as a part of her firm's "key call list" of stocks with upside.

Just before Christmas, ITV acquired a majority stake in U.S. TV production company Gurney for $40 million as part of a transformation plan by management under CEO Adam Crozier to make the company less ad-dependent.

"The deal is in line with the transformation plan given the targeted continued expansion of international studios in the key U.S. market and demand for ITV to deploy its balance sheet," Garrity said.

Sanford C. Bernstein analyst Claudio Aspesi also has an "outperform" rating, the equivalent of other firms' "buy" rating, on ITV's stock. His price target is also $1.78.

That compares to his "underperform" on U.K. pay TV giant BSkyB, in which Rupert Murdoch's News Corp. owns a 39 percent stake, and "market perform" ratings on Italy's Mediaset, owned by Silvio Berlusconi, and French broadcaster TF1.

"The outlook for TV advertising in 2013 is increasingly bleak," Aspesi wrote in a recent report. That led him to cut his ad revenue forecasts for European broadcasters with the exception of ITV. "In the U.K., we are forecasting the market to be flat and ITV to continue to outperform the market" with a slight ad gain, he said.

With ITV's stock hitting a 52-week high in November and nearing analysts' price targets, one key issue for 2013 will be whether they will choose to boost their targets or eventually downgrade the stock to a neutral stance if it runs up further.

Meanwhile, ProSieben also gets a "buy" rating from UBS' Garrity with a $30.50 (23.00 euros) price target despite stock gains this year.

Just before the holidays, she reiterated her outlook after Discovery Communications agreed to buy ProSieben's TV and radio operations in Scandinavia for $1.7 billion.

"The company will reduce debt, pay a higher dividend and merge share classes," which will all benefit investors, she said, adding: "We remain positive [on the stock]."

European analysts are more negative on the stock of Mediaset, which has seen major ad declines and other challenges. And they are mixed on France's Vivendi, which is looking to sell some of its businesses, and BSkyB, which has faced challenges from telecom giant BT for pay TV sports rights.

Jefferies & Co. analyst Will Smith recently reiterated a "buy" rating on Vivendi, citing higher estimates following "robust third-quarter [results] and guidance upgrades." "Additionally, an improving cash position should help alleviate any pressure from ratings agencies" and fears of asset sales at fire-sale prices, he argued.

But Aspesi has only a "market perform" rating on Vivendi. A full break-up of the conglomerate implies 25 percent upside for the stock, he recently wrote. "The divestiture of the telecom assets only, a more realistic scenario," would yield 13 percent upside," he said.

But Aspesi concluded: "The stock could well spike up with the first [sales] deal, but Vivendi will need time to complete the telecom divestiture process. We expect that management will struggle to keep the share price from declining again until it divests [struggling French telecom firm] SFR."

BSkyB, meanwhile, has earned high marks from analysts for managing its business well despite challenges and posting strong results for its latest quarter.

But Smith a few weeks ago downgraded his rating on the stock from "hold" to "underperform." He entitled his report "Moving From Growing the Base to Defending It."

After stock gains this year, "we no longer believe Sky's valuation reflects the challenges it faces as the U.K.'s incumbent pay TV platform as the market matures," Smith said. "With growth slowing, we see increased competition for subscribers weighing on prices/churn and new entrants driving up the cost of content. As such we see risks to the downside."

UBS analyst Polo Tang is more bullish, but only has a "neutral" rating on the stock. "We expect trading for BSkyB to remain resilient over coming quarters and fundamentally, we are positive on BSkyB," he recently wrote. "But the impact of BT on the pay TV landscape is unclear, and this is likely to constrain share price performance over coming quarters."

Email: Georg.Szalai@thr.com
Twitter: @georgszalai