Solid first half for media stocks
Sony, CBS lead way; tough times continue for musicMost big media and entertainment industry stocks closed out the first half of the trading year ahead of their 2006 closing prices, with Sony Corp. and CBS Corp. standing out as key outperformers and setting 52-week highs on the last trading day of the second quarter.
However, the broad-based S&P 50 stock index is outperforming The Hollywood Reporter Showbiz 50 index at Friday's midyear mark -- as was the case at the end of first-quarter 2007.
In good news for sector investors, the Showbiz 50 comfortably moved into positive territory during the second quarter. It is up 4.6% for the year-to-date period as of Friday, compared with the 6% gain in the S&P 500. The Dow Jones index was ahead 7.7%.
Some industry stocks seemed to benefit from a better second quarter after a tough first period that saw many media and entertainment issues falling amid a broader market sell-off.
Conglomerates News Corp. and Liberty Capital as well as cable operator Cablevision Systems had an up first quarter and remain in positive territory.
However, music stocks have remained under pressure, even though EMI Group's shares are up slightly for the first half after its recent takeover talks with private-equity firm Terra Firma.
First-quarter doubts about digital music sales' ability to make up for declining album sales and concerns about weak release schedules were joined in the second quarter by fears that Warner Music Group could make a late and expensive counterbid for rival EMI, according to analysts.
As a result, WMG's stock closed at $14.45 on Friday, near its 52-week low of $14.08 and well below its first-quarter closing price of $16.91 on March 30 and its 2006 finish of $22.44.
During the past three months, Time Warner Inc., the world's largest media conglomerate, made up some of the ground it lost in the first quarter, which saw its stock decline 9.2%.
However, for the first half, TW was still down 2.9%. TW closed Friday at $21.04, compared with its 52-week trading range of $15.70-$23.15. (The Hollywood Reporter uses stock prices adjusted for recent stock splits and dividends, where applicable, for its calculations.)
Meanwhile, the Walt Disney Co., after ending the first quarter up a slight 0.5%, slid into negative territory in the past three months. It closed the first half down 0.4% at $34.14. However, that remains closer to its 52-week high of $36.79 than its year low of $28.69.
Goldman Sachs analyst Anthony Noto recently argued in a report that investors should buy Disney now and for several reasons.
First, he expressed his "confidence in above average growth without a strong economy."
He also pointed out that the summer is "often an attractive entry point for buying Disney as it has underperformed the S&P 500 every one of the last 10 years from June-September, while outperforming from September onward in seven of them."
Finally, Noto said that Disney is "the cheapest large-cap entertainment stock on a forward price/earnings basis" despite "superior" double-digit operating income growth.
Similarly, SMH Capital analyst David Miller recently raised his rating on Disney to "buy" with a price target of $44, citing a more bullish financial outlook. "The Street may be underestimating the free cash flow and earnings power" of the company's media networks unit, he said.
Among other entertainment sector biggies, American depository shares of Sony were the strongest gainer in the first quarter, ending the period up 18.1% at $50.49.
In the second quarter, the company gained more ground as investors seemed to be more confident that the management team led by chairman and CEO Howard Stringer is turning around key businesses. The stock closed the first half up 20.2% at $51.37. It has traded from $37.24-$59.84 during the past year.
Rupert Murdoch's News Corp. has been in the headlines nearly every day as of late thanks to its second-quarter takeover bid for Dow Jones & Co. But while several Wall Street observers have argued that the company's profitability will be dragged down by the planned addition to the group's newspaper business, the stock remains in positive territory this year, even though voting shares were up only 3.3% compared with its Dec. 29 close as of Friday. At the end of the first quarter, they were more than 10% higher. The stock's 52-week trading range stands at $19-$25.78.
Dow Jones shares finished Friday at $57.45, below the $60 per share offered by News Corp. and below its 52-week high of $61.76. However, the stock is way up compared with its $34.23 closing price at the end of the first quarter and its year-ending $37.49.
Viacom Inc. managed to slightly outperform CBS Corp. in the first quarter, but CBS is ahead for the first half. In the first quarter, Viacom ended up 0.1% and CBS down 1.2%. At the halfway 2007 stage, Viacom Class B shares are up 1.5% at $41.63 and CBS Class B stock is up 8.4% at $33.32. CBS set a 52-week high of $34.02 in intraday trading Friday.
The two companies controlled by Sumner Redstone continued to push into the digital space in the latest quarter, and Viacom announced further stock buybacks at the end of May.
Several cable stocks made up ground in the second quarter but remained under pressure compared with their year-end performance, analysts said.
Shares of Time Warner Cable, which began trading in early March, declined in the early going and at the year's halfway mark also are lower, closing Friday at $39.17. However, that was above their first-quarter close of $37.47. The stock has gone as low as $35.93 and as high as $44 since its market debut.
Bear Stearns analyst Spencer Wang recently upgraded shares of TWC from "peer perform" to "outperform," with a $45 year-end price target.
His ratings change was based on proprietary work, which he said "suggests that integration of the L.A. (cable) systems (acquired from Adelphia) is now progressing more smoothly," leading to higher 2008 estimates. He also cited a recent expansion in TWC's share float as part of a so-called true-up mechanism under the Adelphia deal as a factor that will make TWC shares "more investable."
As a result of the TWC upgrade, Wang also moved up his price target on TW shares by $1 to $24.
Meanwhile, Comcast Corp. Class A shares ended the first half at $28.12, closer to their 52-week high of $30.18 than their low of $22.31. That meant a nice uptick over their March 30 close of $25.95, but that's still a slight drop from their Dec. 29 finish of $28.22.
Cablevision Systems ended Friday at $36.19, close to its 52-week high of $36.85 after soaring throughout the second quarter. The shares are up 27.1% for the year as of Friday, compared with their 6.8% gain in the first quarter.
John Malone's Liberty Media Capital saw its Class A shares close the second quarter and half-year mark at $117.68. That's nearly a $20 jump from $97.98, where they ended 2006. It also meant a further gain from the first-quarter ending $110.59.
For convergence stocks, it has been all about Apple Inc. in the first half. The iPod/computer company came out with its Apple TV set-top box this year, and Friday its iPhone debuted.
The stock began the year at $84.84 and closed Friday at $122.04, representing a 43.8% gain in six months.
Some observers expect the iPhone to quickly sell 9 million units or more, boosting the so-called Halo effect, meaning that the phone could persuade some folks to dump their PCs in favor of a Mac computer. This should keep Apple shares humming for a while, according to one money manager whose target price on the stock is $200.
Parks Associates, though, is a bit less convinced that the iPhone will be an instant hit. The firm said that 3% of U.S. Internet users are "highly interested" in picking up an iPhone for $499 plus a two-year service commitment.
"The high price point may prevent the iPhone from achieving greater adoption over the short term," Parks Associates principal analyst Kurt Scherf said. "It may be an early adopter product that appeals to technophiles but initially leaves other interested users on the outside looking in."
Apple and its iTunes/iPod/iPhone juggernaut is making things rough for its digital music competitors. RealNetworks, operator of the Rhapsody music service, saw its shares sink 25.3%, while Napster shares are off 6.3% in the past six months.
A couple other downside movers in new media were Sirius Satellite Radio and XM Satellite Radio. While analysts and investors were thrilled that the two agreed to merge, the bullish sentiment quickly faded as lawmakers and federal regulators expressed monopoly concerns.
Sirius shares ended the first half down 14.7%, and XM shares were off 18.5%.
Netflix also underperformed. The company acknowledged that competition from Blockbuster and its Total Access plan is taking a toll, and Netflix shares dropped 25% in the first half.
Blockbuster shares were down 18.7% this year. The other big player in the movie-rental biz, Movie Gallery, was one of the worst performers on the Showbiz 50, falling 46%.
Elsewhere in new media, video game stocks were mixed, not enjoying much of a boost from the platform upgrades, and Yahoo Inc. and Google Inc. ended the first half higher.
One new-media gainer, Imax Corp., was up 12.2% this year, though that's after falling more than 40% in 2006.
One video game maker, Take-Two Interactive Software, benefited from a board room makeover. Its shares were up 12.4%. Activision shares rose 8.3%.
Electronic Arts, THQ Inc. and Midway, though, were off 6%, 6.2% and 8.9%, respectively.
Google has been routing the competition, and its shares have advanced 13.5% compared with an advance of 6.2% for Yahoo, where CEO Terry Semel recently stepped down and was replaced by co-founder Jerry Yang.
Georg Szalai reported from New York. Paul Bond reported from Los Angeles.