Media stocks lose ground, still faring well

Some hoping for summertime recovery; others see challenges

The stock market roller-coaster ride of recent weeks left the broad-based S&P 500 stock index slightly down for the year entering the Memorial Day weekend.

Entertainment conglomerate stocks also have generally tumbled off the 52-week highs they set in the past two months, but most are entering the summer season slightly ahead of their 2009 closes -- with Viacom, followed by Time Warner, up more than its peers -- and outperforming the S&P 500.

Some hope for a summertime recovery, helped in part by stronger upfront advertising sales, but others see more market and valuation challenges ahead for sector powerhouses.

In April, analysts were debating whether shares of media giants had run up too far ahead of the first-quarter earnings season, with some predicting a pullback. Earnings reports generally were good or ahead of expectations, but then European debt worries and other bigger issues came into play.

"This action is really macro-driven," RBC Capital Markets analyst David Bank said. "Media fundamentals remain solid and valuations generally attractive."

Miller Tabak analyst David Joyce also cited "overall market concerns and de-risking" as culprits of the sector pullback.

"Media companies posted a fine first quarter, with most companies matching or beating revenue estimates and, even more impressively, margins," he said. "Ad revenue is still going to show good growth in the second quarter. We don't think ad buyers will pull back in the upfront negotiations, but certainly they will try to use the nervous macro conditions as a negotiating point to try to keep price increases below 10%."

Veteran entertainment analyst Hal Vogel predicts more pressure on sector stocks ahead. "The demand and pricing will likely slide again into 2011, and this is what the entire market and the especially sensitive media stocks are starting to sense," he predicted. "My advice is to sell these shares and revisit again late this year or next year."

Of the biggest entertainment companies, News Corp. is the one whose shares are running behind their 2009 finish. After ending the first quarter up at $17.01 then reaching a 52-week high of $18.80 in late April, the stock ended the week at $15.36 after a monthlong tumble. That's down 3% for the year and 18% off its year-high.

Besides the broader-market woes, some analysts said investors had been hoping for a stock-buyback announcement as part of News Corp.'s latest quarterly earnings report. Instead, management said it was reviewing options for the use of its cash.

CBS Corp.'s stock fell in the first quarter, but it's now up 3.6% for the year. After its 2009 close of $14.05 and March finish of $13.94, it hit a 52-week high of $16.98 in early May before dropping back to a Friday close of $14.56 amid the market decline. Wall Street has lauded continuing strong advertising growth at the company and a solid upfront outlook.

Viacom has outperformed everyone for the year-to-date and was up 17.4% before the holiday weekend for 2010. Its stock has risen from $31.50 at the end of 2009 to $36.68 at the end of the first quarter and a 52-week high of $41.79 in mid-April. While it has dropped from there, it even managed to rise a tad more from the end of the first quarter to $36.98 at the end of May.

Time Warner, Disney and Sony shares have followed similar movements and remain slightly ahead this year going into June.

Disney went from $32.25 at the end of 2009 to $34.91 at the end of the first quarter and to a 52-week high of $37.98 in early May. It stood at $33.42 on Friday, up 3.6% for the year.

Sony moved from $29 to $38.32 and a 52-week high of $40.45 in late March before dropping to $30.78. That left it up 6.1% year-to-date.

TW rose from $29.14 to $31.27 in the first quarter and notched a late-April 52-week high of $34.07, but it has since retracted to $30.99. A bullish investor day Thursday that led to various upbeat reports from analysts helped make up ground late in the week, though. It was up 6.3% in 2010, more than any other entertainment conglomerate.

By comparison, the S&P 500 ended 2009 at 1,115.10, rose to 1,169.43 at the end of the first quarter and ended the week at 1,089.41, marking a minimal decline for 2010.

Two smaller publicly traded studios have gone their own way, driven by company-specific issues.

DreamWorks Animation ran up strongly early this year to hit a 52-week high of $44.77 in late March before concerns over weaker-than-hoped boxoffice opening weekends for "How to Train Your Dragon" and, more recently, "Shrek Forever After" put a drag on the stock. It closed Friday at $29.69, down 25.7% from its 2009 close of $39.95.

On May 24 alone, DWA shares tumbled 11% amid the sluggish "Shrek" boxoffice. Janney Montgomery Scott analyst Tony Wible, who rates the stock at "neutral," warned that Street financial estimates for the company might have to come down, arguing that they do not yet "adequately discount weaker performance on 'Shrek' and 'Dragon' and the absence of a third film next year."

Lionsgate, which has been stalked by dissident investor Carl Icahn, fell early this year before making a recent recovery. After its $5.81 close for last year, it slid to a 52-week low of $4.81 in early February before rebounding to end the first quarter at $6.24. Although entertainment conglomerates have declined since the end of March, Lionsgate shares have risen to $6.80 as of Friday. The stock starts the summer season at plus 17% for the year.