Sony, Viacom, CBS Lead Entertainment Stocks After Three Quarters

CBS Upfronts Big Bang Theory - H 2013

CBS Upfronts Big Bang Theory - H 2013

Conglomerates beat the overall market handily, but the biggest growth came from smaller companies like Netflix and Lionsgate Entertainment.

Perhaps Sony investors owe some gratitude to activist shareholder Daniel Loeb --  the conglomerate's stock surged 92 percent in the first three quarters of 2013, which ended Monday, outperforming all other media conglomerates.

The next-biggest gainers among conglomerates are Viacom, up 61 percent through three quarters, followed by CBS (up 46 percent), Time Warner (up 40 percent), Walt Disney (up 30 percent) and Comcast (up 22 percent). While 21st Century Fox has only been separated from News Corp since June, its shares are up 50 percent in the first three quarters this year on an adjusted basis, according to Yahoo! Finance.

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While the conglomerates handily beat the overall market -- the S&P 500 grew 18 percent in the first three quarters -- some smaller entertainment companies far outpaced the industry giants. Netflix, for example, rose 234 percent, while Lionsgate Entertainment was good for 114 percent. And despite Turbo’s unimpressive box office, DreamWorks Animation is up 72 percent through three quarters, better than all conglomerates except Sony.

Gaming stocks have performed well, with Electronic Arts up 76 percent, Take-Two Interactive Software up 65 percent, Activision Blizzard up 59 percent and Zynga up 56 percent.

Two new-media darlings lagged behind the more traditional media companies by a long shot: Google gained 24 percent so far this year, while Apple is down 9 percent. Yahoo has fared much better, up 67 percent.

Movie exhibition companies also are doing well so far this year, with Carmike Cinemas leading the pack, up 47 percent. Regal Entertainment Group is up 41 percent, IMAX is up 34 percent and Cinemark Holdings is up 25 percent.

Time Warner Cable, which says it was hurt by its carriage dispute with CBS, under-performed in the broader markets, though just slightly. Its stock is up 17 percent through three quarters.

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Dish Networks outperformed DirecTV -- they are up 24 percent and 19 percent, respectively -- and Discovery Communications is up 33 percent.

Going forward, analysts seem especially bullish on Time Warner for the next year or so as far as the major conglomerates are concerned.

Morgan Stanley analyst Benjamin Swinburne in mid-September, for example, upgraded his rating on the stock from "equal-weight" to "overweight," calling the entertainment company "a lean, mean TV machine."

He also raised his earnings estimates and price target to $72, arguing that the company's valuation was "at the low end of peers despite strong growth and below-peer average ad exposure." On Monday, the stock closed at $65.81.

Following the spinoff of its Time Inc. publishing arm next year, the new TW will get 90 percent-plus of its operating earnings "from the healthy and growing TV ecosystem," Swinburne said. He also touted "accelerating growth from 2014-2016…multiple sources of margin upside to consensus and the benefits of above-average financial leverage."

The spinoff will make TW "a concentrated bet on global TV growth," Swinburne said. Emphasizing that TW is a content company, the analyst said that "notably, owned content drives growth at HBO and the film segment."

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Wunderlich Securities analyst Matthew Harrigan says TW is his favorite media stock now because it is less economically sensitive, with affiliate fee growth at Turner TV assets, for example, and because HBO and Warner Bros. are chronically undervalued.

On the flip side, Disney could under-perform for the next year or so, some analysts say. “Disney appears fairly valued with economic exposure,” Harrigan said.

Swinburne downgraded his rating on Disney stock to "equal-weight" and cut his price target to $70, arguing that the Hollywood conglomerate's traditional premium stock price is "no longer a given." The stock closed at $64.49 on Monday.

"Since 2009, we built our thesis on confidence in ESPN’s pricing power and returns on [theme] parks investments," the analyst said. "This thesis has largely played out and is reflected in estimates. From here, growth shifts to a greater reliance on creative success, including proving out acquisitions at the box office."

Wall Street particularly expects "a major earnings contribution from the recently acquired Lucasfilm," Swinburne said. "We are not betting against Star Wars being a global box office hit in 2015, but rather the ability to deliver earnings and returns beyond what is already discounted in shares. This is in light of the unclear film/consumer products benefit since the Marvel acquisition -- despite smashing box office success, highlighted by the $1.5 billion worldwide box office hit The Avengers."