Tough first quarter for big media

All of the conglomerates see shares decline

Big media and entertainment stocks continued to have a tough time during the opening quarter of 2009.

All of them saw share declines, and other than Viacom Inc. and Sony Corp., they underperformed the broad S&P 500 index, which fell 11.7% in the first quarter, from 903.25 to 797.87.

One concern is that there might be more downside to earnings expectations in the sector.

"Swift and deep cuts to 2009 consensus estimates across large-cap media (stocks) during the last year have created a more constructive setup, but 2010 estimates are still generally 10% higher than ours, keeping us mostly defensive," Goldman Sachs analyst Mark Wienkes wrote in a recent report.

CBS Corp. ended the quarter on a sour note after a UBS downgrade Monday that dragged the stock down further before it recovered slightly Tuesday to close at $3.84. The firm's market capitalization is only $2.6 billion, according to Yahoo Finance.

The quarter's performance meant a 52.4% decline for CBS shares from their Dec. 31 close of $8.07. The stock finished March better, though, after hitting a 52-week low of $3.08 mid-month.

Time Warner also was hit hard again despite analyst praise for its just-completed spinoff of Time Warner Cable, which allows the conglomerate to focus more sharply on its content businesses, and the hiring of a new AOL chairman and CEO in former Google exec Tim Armstrong.

TW shares closed Tuesday's trading session at $19.30. Accounting for the TWC spinoff, the stock fell 29.4% during the past three months from an adjusted Dec. 31 close of $27.33.

Longtime industry darling Disney, which has received downgrades as the recession hits it harder, also has lost ground since the end of 2008. Its shares closed at $18.16 on Tuesday, down 20% from their 2008 finish of $22.69.

Pali Research analyst Richard Greenfield recently turned more careful on Disney, downgrading the stock from "neutral" to "sell."

"While Disney has one of the best secular-asset mixes within the media sector, essentially everything is going wrong at the same time, with the length of pain likely to extend further than we had previously expected," he said.

News Corp. shares also have lost value in the double-digit percentage range, falling from $9.48 to $7.70 year-to-date, an 18.8% decline.

CBS corporate sibling Viacom, which has gained Wall Street support on signs of renewed ratings momentum, favorable summer-tentpole film comparisons and a lower relative valuation, held up much better than most peers. Its shares fell 8.8%, from $19.06 to $17.38, during the first three months of the year.

American depositary shares of Sony were the best performer among sector conglomerates. They lost 5.7% during the first three months of 2009, declining from $21.87 to $20.63.

Stock markets worldwide have seen bounces from their lows during recent weeks, prompting debate about whether they have hit bottom. But most on Wall Street expect those bounces to be temporary, a common phenomenon during recessions.

"This bear has not breathed its last, though it's taking a rest for a while," said Hal Vogel, president of Vogel Capital Management.

Miller Tabak analyst David Joyce, though, recently suggested hope for "prolonged multiple expansion" by conglomerates if market sentiment continues to improve.

Some stocks in the media and entertainment sector have seen gains this year, with 18 of 50 companies in The Hollywood Reporter Showbiz 50 index up for the quarter.

Radio and TV station groups were among the weakest performers during the first quarter because of recessionary advertising declines. Shares of TV group Sinclair Broadcast have lost 66.8% of their value year-to-date, followed by Belo Corp. (down 60.9%) and radio firm Cumulus Media (down 59.4%).

Looking ahead, Wienkes expects content hits to affect conglomerate stocks more than usual, which he says might help shares of Viacom and News Corp.

"As ad-revenue trends stabilize, outperformance in operating-income and earnings-per-share growth will increasingly be driven by the short-term success of studio content, as well as the ability to aggressively manage costs," he said.
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