Morgan Stanley: Media stocks looking 'attractive'


Media stocks have underperformed during the recession, but if analysts at Morgan Stanley are correct, their fortunes are about to improve.

Led by Benjamin Swinburne, the Morgan Stanley media team changed its rating of the sector from "in-line" to "attractive" and upped price targets on most of the stocks covered.

The bullish catalysts they cite in a just-released 53-page report are numerous but boil down to a simple concept: Things aren't nearly as bad as investors think they are.

Morgan Stanley predicts 2% ad growth next year, whereas the consensus is for flat at best. "We see much greater upside than downside in 2010 advertising estimates," the report says. Another example is DVD sales, where the analysts conclude "erosion will likely be slower than expected." For evidence, they cite year-to-date sales that are down 10%, while expectations were for a 15% decline.

The analysts say healthy boxoffice this year will lead to good DVD sales the remainder of the year; plus, "Blu-ray pricing is helping revenue, as is rental stability," according to the report.

The study regurgitates the usual media-industry challenges, but the Morgan Stanley analysts seem more confident than others that executives will turn those challenges into advantages -- eventually.

Ad-skipping DVRs, though scary, actually lead to increased TV consumption. The average amount of time each American spent watching TV in the first quarter grew 2.7% to 5.17 hours a day, while time spent online grew just 0.3% to 0.99 hours, the report says.

Plus, DVRs, now in about 30% of U.S. homes, coupled with VOD, in 41% of U.S. homes, "will continue to move the TV content model away from advertising revenue and toward subscription fees."

A major thesis from the report is that media stocks are cheap, trading at 75% of their average for the past seven years, based on the group's price-to-earnings ratio. By way of comparison, the S&P 500 is at 93%.

The media group "has underperformed the S&P 500 by some 14% on a cumulative basis since the beginning of the current recession," the report says. "We see a cyclical ad recovery and solid secular trends within media reversing this trend."

Naturally, Morgan Stanley has its favorites: Disney, Time Warner and CBS.

The firm raised its one-year target price on Disney by $4 to $30. On Tuesday, the stock closed at $25.20.

The analysts say fiscal-year 2009 was a bad slate year for Disney's film studio, citing "Bedtime Stories," "Bolt" and "Confessions of a Shopaholic" as evidence. Next year's slate, though smaller, will lead to bigger profits. Morgan Stanley is bullish on "A Christmas Carol," "Alice in Wonderland," "The Princess and the Frog" and "Toy Story 3."

Another positive catalyst is Disney's ESPN, where ad revenue will grow by 5% during the next fiscal year as auto advertising recovers, the analysts said. ESPN's auto exposure is 12%-15% of revenue.

For Time Warner, analysts upped their target price by $6 to $31 largely because they like the dividend and aggressive share-repurchase program. The stock closed Tuesday at $26.99.

Although Time Warner bears see a history of dilutive acquisitions, Morgan Stanley sees "a clear path to improvement in returns as the company focuses on its core content business."

For CBS, the firm upped its target price by $2.50 to $8.50. The stock closed Tuesday at $7.23.

If Morgan Stanley's thesis on advertising growth is correct, CBS will be a big beneficiary. Even radio could return to modest growth, and the billboard business is "a long-term share gainer in local advertising," the firm says.

Plus, while others view CBS as overleveraged, Morgan Stanley says its improving free cash flow next year and the year after will allow it to "rapidly de-lever and refinance upcoming maturities."

CBS, the analysts say, "merely needs to show growth in 2010 and hit current estimates for the shares to outperform."