Wall Street Debates Entertainment Stocks Amid Renewed Economic Fears

More ad-focused stocks like Viacom and Disney could see investors move money into Time Warner, Liberty Starz and Netflix, says Janney Montgomery Scott as analysts also discuss the outlook for CBS Corp.

NEW YORK - Wall Street is once again debating whether recent weak economic data could potentially lead to another economic downturn - a so-called double-dip recession.

Amid such concerns about the economic outlook, some also wonder if the still-strong TV advertising market could be hurt along with the stocks of media and entertainment giants, many of which get a majority of their profitability from their TV networks operations.

Indeed, just like the broader market, many sector stocks have been trending down in recent days amid the U.S. debt ceiling debate and latest economic data.

But the heads of media and entertainment conglomerates, such as CBS Corp. CEO Leslie Moonves and NBCUniversal CEO Steve Burke, have in earnings conference calls this week said they haven't seen any negative effect on ad momentum so far.

Nonetheless, "economic deterioration would increase pressure on ad revenue and discretionary spend on media," a team of Janney Montgomery Scott analysts, including entertainment expert Tony Wible, said in a report on Wednesday.

The report also predicted which sector stocks are potential victims in case of another downturn and which stocks could hold up better.

"We would expect investors to rotate funds away from names with greater exposure to advertising (Viacom, Disney) towards names with more subscription revenue - Time Warner, Liberty Starz, Netflix," the report concluded. "However, an economically driven drop in DVD sales and theatrical attendance would hurt all the large cap names, which would also carry over to Cinemark, DreamWorks Animation and Regal Entertainment Group." Traditionally, box office is seen as more insulated from a recession.

"Lastly, TiVo’s cash rich position and unique intellectual property driven model isolates the name from economic headwinds, while derivative moves in foreign currency could help DWA and Cinemark should the U.S. dollar decline on economic fears," the Janney report also said.

In follow-ups to the first financial report of this earnings season from a U.S. entertainment biggie, CBS Corp., many analysts on Wednesday lauded the company's strong financial performance and moves to diversify beyond ad revenue, but some said an economic downturn than others, which could keep a lid on its stock amid economic concerns.

"Results showed continued model evolution with advertising declining to 62 percent of total revenue from 65 percent in both the first quarter of 2011 and 2010," said Davenport analyst Michael Morris. But despite raising his earnings estimates, he didn't boost his price target on the stock, citing "overall ad market uncertainty, which is likely to remain an overhang in the absence of improved economic data."

Morris continues to like CBS shares though due to company-specific trends, such as growing retransmission fees, and he maintained the stock as his top pick for the back-half of 2011.

Similarly, Marci Ryvicker, analyst at Wells Fargo, said that despite economic headwinds, new revenue streams, such as retransmission consent and deals with digital video distributors, mean that CBS should "remain a core holding" for investors.

Cowen analyst Doug Creutz expressed more caution. "The company continues to have significant operating momentum; however, with economic headwinds gathering, we believe it is prudent to maintain our "neutral" rating," he said. "Although management was clear that advertising demand remains strong, we believe vigilance is warranted."

Creutz pointed out that June was the third straight month that seasonally- adjusted real personal consumption expenditures declined sequentially. "Since 1995, other than a blip around Hurricane Katrina, the only other time that there have been consecutive sequential declines in this metric was during the February 2008- June 2009 economic collapse," he wrote. "Our research indicates that advertising spending is most correlated with PCE among key economic indicators."

And Barclays Capital analyst Anthony DiClemente said: "While CBS reported a very strong second quarter in part driven by incremental revenue from its digital media deal with Netflix, we worry that CBS stock performance may start to reflect macroeconomic concerns in the near term."

But he, too, lauded CBS for "making all the right strategic moves to prepare and "de-risk" its business ahead of a potential downturn as non-cyclical content deals were recently completed with Netflix International and Amazon."

Email: Georg.Szalai@thr.com

Twitter: @georgszalai