Media stocks up; slow ad recovery expected

Experts see little upside in sector stocks for now

NEW YORK -- Media and entertainment stocks rose sharply Friday on bullish ad-market comments from CBS Corp. CEO Leslie Moonves in his company's late Thursday earnings conference call last week.

But the gains came amid a growing Wall Street chorus suggesting that sector biggies will need to take a breather after an extended rally that started in March. Many point to little evidence this earnings season that the U.S. economic and ad recovery will be anything but slow.

Still, CBS shares shot up 27% to $10.81 on Friday. The stock of corporate sibling Viacom rose 5.8% to $26.32. News Corp.'s stock climbed 5.4% to $13.05, its highest close in nine months, and Disney's shares advanced 5.2% to $26.69. Time Warner gained 3.7% to $28.34. The major stock indices rose only in the 1.2%-1.4% range for the day.

Year-to-date, News Corp. is up 38%, followed by CBS (35%), Viacom (31%), Time Warner (27%) and Disney (18%). The broad-based S&P 500 index is up 12% over the same time frame.

Now the question is whether they will be able to go higher and quickly.

With latest quarterly earnings now in for all sector conglomerates, most upside to financial expectations came from cost cuts rather than any real upward revenue momentum. And only CBS was bullish on third-quarter ad momentum.

Moonves argued Thursday that ad trends had further accelerated in recent weeks, but most in the industry cited a continued lack of visibility and predicted only a slow rebound.

Analysts Friday also struggled to explain this.

In a note to investors, "Crying Wolf or Calling the Turn," Sanford Bernstein analyst Michael Nathanson suggested that "part of this strength at CBS could be due to a compare issue as CBS Network was down 12% in the third quarter of 2008 due to the Olympics on NBC, political coverage of the Democratic and Republican national conventions and tropical-storm coverage."

Other analysts also raised doubts, with many arguing that they want to see further evidence of ad improvements at CBS and beyond.

Barclays Capital analyst Anthony DiClemente said the CBS trends could mean upside across the sector if they are real. But overall, earnings trends for the second quarter led various analysts to suggest that the run-up in sector stocks might have gone too far.

Miller Tabak analyst David Joyce, for one, in recent days downgraded Viacom, Disney and News Corp. shares -- all from "buy" to "neutral" -- for that reason.

Discussing Viacom, he echoed key themes that apply to various stocks: He said he is waiting, for example, for "a new round of positive economic data later in the second half of 2009" before the stock can rise further. "We sense investor-relief fatigue as stocks rebounded faster than fundamentals." This should mean "more trading-range-type activity in advertising-reliant media stocks" over the near term.

Running ahead of business fundamentals also was a theme for Nathanson this earnings season. He warned that "at current levels, News Corp. appears to be anticipating a recovery in advertising growth that we believe might be slower in coming than currently anticipated." He also sees Time Warner shares as "fairly valued" right now.

Analysts continue to disagree on stocks beyond CBS. Case in point: Disney. Analysts at JP Morgan recently cut their rating on the Mouse House from "neutral" to "underweight," arguing that "ESPN, parks and consumer products will continue to be a headwind for the company's earnings."

But for DiClemente, Disney is his current top pick in the entertainment space. He cites such factors as "multiple expansion for public cable TV networks" and the fact that recent film flops have now been priced into the stock.