Wall Street seeking catalysts to sustain media-stock surge

Third-quarter earnings season will play a big role

The fourth quarter started with a pullback of stock markets after a long rally that began in March, but since then stocks have made a comeback.

Shares of big media and entertainment companies, which recently received love from analysts striking more bullish advertising tones, also were among those that fell and then rebounded.

How the stocks of sector biggies will do through year's end will depend in part on third-quarter earnings season, which kicks off with today's financial update from General Electric, including its NBC Universal unit.

Early earnings reports from the likes of Google have beaten expectations, and Wall Street expects the latest earnings from media and entertainment giants also could provide upside surprises. But investors really are looking for positives on ad-revenue trends and guidance to further drive up stocks during the coming weeks.

Otherwise, sector stocks finally could end their upward run, which has seen many up big year-to-date.

The consensus was for slow, drawn-out ad improvement. But UBS analyst Michael Morris recently upgraded the sector, predicting ad revenue ultimately will rise to pre-recession levels. He boosted his price targets and earnings estimates for this year and next on CBS Corp., Disney and Time Warner.

"Consensus media estimates will be revised upward in the coming months as advertising-revenue outlooks improve," he predicted.

Shares of CBS Corp. already were up about 50% as of the end of the third quarter -- they're up 62% year-to-date as of Thursday's close, Bloomberg said. News Corp. and Viacom follow closely, up 46% apiece as of the end of September and 54% and 50%, respectively, as of Thursday.

Time Warner and Sony also are running ahead in double-digit percentages, up 38% and 34%, respectively, year-to-date, according to Bloomberg, which also shows Disney up 29% this year.

Sector stocks already had handily outperformed the Dow (up 10.7%) and the broad S&P 500 stock index (up 17%) through the end of September.

Among other entertainment stocks, DreamWorks Animation shares are up from $25.26 to $33.67, a 33% gain.

Goldman Sachs analyst Ingrid Chung this month added the stock to her firm's Americas Conviction Buy List, suggesting it could gain steam going into next year.

She raised her 2010 financial estimates on DWA and boosted her price target to $45; that target also incorporates a 25% chance of a takeover at $50 a share. TW has been among the potential suitors cited.

Among the things Chung likes: Street estimates, she said, assume lackluster attendance for 3D films next year; "Shrek 4" expectations are still "conservative"; and the firm has a "compelling valuation" that does not incorporate much premium for a potential acquisition.

Viacom and TW have also received some analyst support. UBS' Morris upgraded his rating on Viacom shares last month from "neutral" to "buy" and boosted his price target from $26 to $34. His argument: Viacom's market value has fallen too far below peers.

Later in September, Barclays Capital analyst Anthony DiClemente reiterated his support for Viacom shares, saying they trade at the most attractive price/earnings ratio in all of media. He raised his price target by $5 to $32 and maintained his "overweight" rating.

TW has earned praise recently ahead of its planned AOL separation. Pali Research analyst Richard Greenfield raised his price target by $7 to $35 after raising his 2009 and 2010 financial estimates and predicting more upside for the content businesses.

"There is substantial value-creation potential within TW's existing assets mitigating the need/risks associated with acquisitions (such as Vivendi's 20% stake in NBC Universal, Scripps Networks, DreamWorks Animation, etc.)," he said.

Georg Szalai can be reached at georg.szalai@thr.com.