Walt Disney, Viacom, Time Warner Shares Below 2010 Closing Prices as Fourth Quarter Kicks Off

A stock specialist on the floor of the New York Stock Exchange August 5, 2011 - H
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News Corp. and CBS Corp. are still up year-to-date and are the best-performing entertainment conglomerate stocks, while Netflix has fallen 34.6 percent below its December close.

NEW YORK – A tough third quarter for stock markets has taken a toll on entertainment conglomerate stocks.

As of late June, all entertainment giants except for Sony Corp. had been ahead of their 2010 closing prices and outpacing the broad-based S&P 500 stock index.

What a difference a quarter makes! Now, a couple of days into the fourth quarter, shares of Viacom - down 3.9 percent year-to-date - Time Warner (down 6.6 percent) and Walt Disney (down 20.4 percent) are all below their 2010 closing prices.

Sony Corp., which has had a rough year following the earthquake in Japan and the PlayStation privacy infringements, is seeing its U.S. shares down 47 percent from the end of 2010 at $18.82.

A couple of the Hollywood conglomerates have stayed in positive territory though when compared with the year-end 2010. Despite recent downward pressure, CBS Corp.’s stock, at $19.59 as of Tuesday’s stock market close, remains 2.8 percent ahead of where it finished last year. While CBS Corp. had been the best sector performer in 2010 and most of this year, Rupert Murdoch’s News Corp., while still below the levels it had seen before the phone hacking scandal, is now up the most among entertainment conglomerate stocks in 2011 – up 6.7 percent at $15.54 as of Tuesday evening.

As of the market close, the S&P 500 was down 10.6 percent, outperforming Disney in addition to Sony, but being outpaced by the other Hollywood biggies.

Global economic concerns, the European debt crisis and stock market declines have put many sector biggies into negative territory though over the last couple of months. 

Even Netflix, which has been flying high in recent years, has seen its stock fall 34.6 percent below its 2010 closing price as of Tuesday when it finished at $114.90, meaning that most entertainment stocks have done better now for the year-to-date. Netflix, of course, has been hit by a recent price hike and resulting subscriber losses.

The final quarter of 2011 had a weak open on Monday, and on Tuesday, in the latest sign of continued volatility, markets only edged up late in the trading day, pushing entertainment biggies up for the day.

Still, some on Wall Street expect an extended period of weakness for entertainment conglomerate stocks. “Downward pressure on media stocks’ valuation multiples will likely persist through the second quarter of 2012,” Vasily Karasyov, analyst at Susquehanna Financial, said in a report Tuesday. “It is unlikely that we will see the usual seasonal bounce in media stock performance in the remainder of this year.”

Cowen analyst Doug Creutz last week also said that times of economic weakness typically lead to "significant" market value compression among big media and entertainment stocks, predicting that in the case of a recession in 2012, big sector stocks would have 15 percent-25 percent further downside.

But Miller Tabak analyst David Joyce sees the potential for some stock gains during the upcoming quarterly earnings season.?“Due to market conditions, we are reducing our less then one-year price targets across our coverage universe,” he said Tuesday. “But we are keeping our predominantly “buy” ratings on these companies…as we believe the overreaction by the stocks should have positive reactions to the earnings season” given that strong national ad revenue momentum has so far continued.?

“I think stocks should react well during earnings season as our indications have been that the third quarter was fine,” Joyce explained. “But everything is based on the Greek debt situation because of potential consumer deleveraging contagion that could lead Europe and the US into a recession.”

By early August, Wall Street analysts had started debating the outlook for entertainment stocks amid renewed fears of a double-dip recession and then following a downgrade of the U.S. debt rating. More recently, several analysts have downgraded their U.S. advertising spending forecasts, which affects big media companies.

"We believe that the macro-economic writing is on the wall and that advertising growth will, over time, converge to the pace of overall market growth," Davenport & Co. analyst Michael Morris wrote last week.

Creutz added: "Large-cap media shares have declined in recent months due to increasing concerns about the trajectory of the economy."

Morris has said that his entertainment stock top picks are AMC Networks due to company specific momentum and CBS Corp. when looking at recent values.

And Creutz said: "In the event that the economy does slip into recession in 2012, we believe that "outperform"-rated Discovery Communications and Time Warner, as well as "neutral"-rated Viacom are likely to be relative outperformers in the large-cap media group due to their lower earnings per share leverage to the economy."

Joyce this week introduced a new framework to assess entertainment stocks amid the current challenges. For example, he listed Discovery Communications on a list of “good long-term buys, but with U.S. dollar foreign exchange translation exposure hindering the shares somewhat.”

Joyce also has a group of entertainment stocks that he considers “good long-term buys, but with potentially three to 12 months of economic weakness causing negative investor sentiment as these have higher-than-peers local advertising exposure or greater consumer discretionary exposure.” Among those stocks, he lists such conglomerates as CBS Corp., News Corp. and Walt Disney.

A final category – “good long-term buys, but with long-term asset turnarounds required or near-term reversal of subscriber losses required to offset negative sentiment” – includes cable firms Cablevision, Comcast and Time Warner Cable, as well as AOL.

Email: Georg.Szalai@thr.com

Twitter: @georgszalai