Media powers see stock rebound in Q3

CBS, Viacom among gainers; can momentum keep going?

NEW YORK -- After a dismal second quarter for big entertainment stocks, the just-ended third quarter saw shares of sector biggies gain amid ongoing strong TV advertising sales.

But analysts have mixed feelings about the year-end period, saying economic and ad-market signs for 2011 will be key drivers along with how strong investor concern about the effect of new technologies on established entertainment players will be.

"For now, it seems like sentiment will hold up as TV execs are still seeing strength into 2011," Miller Tabak analyst David Joyce said. Plus, "many of the largest companies are now or will soon start buying back stock, which should help." He mentioned Time Warner, Viacom and Disney as examples.

Similarly, Anthony DiClemente of Barclays Capital recently predicted more stock buybacks and dividends instead of major acquisitions that could hurt shares.

"That is one reason we like the stocks at recently corrected levels," he said.

Meanwhile, Benchmark analyst Frederick Moran recently downgraded the two stocks he covers, Time Warner and Viacom, from "buy" to "hold," arguing that "a stalling economic recovery could hinder advertising and home entertainment sales."

Hal Vogel, president of Vogel Capital Management and a former industry analyst, remains pessimistic.

"I remain bearish on the stocks and on the economy," he said. "None of the major [entertainment] stocks has advanced to new high ground since spring. The next move is down."

Spencer Wang of Credit Suisse recently trimmed his 2011 financial estimates for sector bigwigs because of his "more moderate" advertising-growth assumptions and prediction that investors will grow more concerned that consumers could substitute free or cheaper online video for pay TV subscriptions.

"It is not out of the realm of possibility that media trades at a discount to the S&P 500" as a result, even though sector stocks are trading slightly higher than the broader market's price/earnings multiple.

Either way, all media-conglomerate stocks rose during the third quarter, from Disney's 5.1% climb to CBS Corp.'s ad-excitement-fueled 22.7% gain, with about half of companies outperforming a 10.7% gain in the broad-based S&P 500 stock index.

Except for News Corp., all enter the year's final quarter ahead of their 2009 closes and year-to-date have outperformed the S&P 500, which ended September about 2% above its year-end 2009 figure.

But only CBS Corp. and Viacom shares begin the push to year's end above first-quarter closing prices. After all, around the end of the first quarter, many media and entertainment giants hit 52-week highs.

Year-to-date, Viacom is the best-performing conglomerate, closing Thursday at 27% above its 2009 finish and easily leaving the S&P 500 in the dust.

The weakest big-media performer this year is News Corp., whose play to buy full control of BSkyB and lower-than-expected guidance for its current fiscal year seem to have added to concerns about the future of MySpace and the firm's ability to continue growing its film business. Its shares are down more than 5% this year.

All of the conglomerates' runs have been outperformed handily by Netflix, whose shares have been soaring amid ongoing subscriber growth and recent content deals with the likes of Epix that have positioned its online-streaming service as a force.

Netflix shares have nearly tripled, from $55.09 at the end of 2009 to $162.16 on Thursday, leading some to wonder whether the stock might have little to no upside remaining.

"Good company but overvalued," said Wedbush Securities analyst Michael Pachter, who has an "underperform" rating on the stock.

Satellite TV giant DirecTV also has done particularly well. Shares this month hit their highest level since the company began using its current name. The stock closed Thursday at $41.63, up 24.8% for the year.

Disney remained the conglomerate with the largest market capitalization as of third quarter's end -- $63.3 billion, compared with 61.7 billion at the end of the second quarter, according to Bloomberg. Behind that, News Corp. ($35.8 billion vs. $32.9 billion at the end of June) again overtook Time Warner ($34.5 billion, up from $32.95 billion).

All are well below Apple's closing market value Thursday: $259.2 billion. The tech giant recently became the second-most-valuable U.S. company behind Exxon Mobil.

Which Hollywood giants have the most upside from current stock prices? Several analysts mentioned Viacom and News Corp.

Asked to pick, Joyce said, "I still say News Corp., although it is more volatile, mostly reliant on whether they can get BSkyB, [which], while expensive, could be a positive catalyst by adding recurring revenue streams and free cash flow." He rates the stock "buy" with a near-term $19 price target and a long-term target of $21.

BTIG analyst Richard Greenfield is concerned about MySpace and other parts of the firm but said recently that "the ad market has started off the fiscal year quite strong for News Corp."

Meanwhile, Gabelli & Co. analyst Christopher Marangi said Viacom continues to be his favorite content stock. He cited the start of planned stock buybacks and improving ad trends as drivers.

Similarly, DiClemente recently predicted more stock buybacks and dividends from media giants, citing Viacom -- which he rates at "overweight" -- as the conglomerate "most investable" along that theme.

Joyce on Thursday boosted his Viacom price target from $39 to $43, citing "strong third-quarter ratings gains at core cable networks that are helping to support advertising growth."

Greenfield at the beginning of the month also touted Viacom's MTV as being "in the early stages of a resurgence," arguing that its ratings and ad revenue will continue to show positive momentum during the coming months and warrant a new look at the company from investors.
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