A rebound in advertising should give a lift to the earnings of the big four U.S. media conglomerates, but there is uncertainty about the extent of the recovery and mixed views on the trajectory of their stocks.
Shares of Time Warner, Viacom, News Corp and Walt Disney attracted big money in the fourth quarter of 2009 on hopes that ad rates will bounce back in 2010.
With these companies' stocks having rallied about 14.2 percent so far this year, compared with a 6.7 percent increase in the S&P 500, analysts say investors will now start to get increasingly picky.
Viacom is due to report its earnings Thursday, News Corp and Time Warner Inc report next week and Walt Disney the following week.
Many analysts single out Time Warner as being most vulnerable to sell-offs in the next few months, while stocks like Viacom and News Corp are seen as good buys because of their bigger exposure to an ad recovery as well as long-term beneficial trends in the cable industry.
Some see gains in Walt Disney's stock being muted by its broad asset mix which will minimize the company's upside leverage to the ad recovery.
The earnings will give us a chance to see how much the ad recovery is taking hold and who's better positioned, said Tony Wible, analyst with Janney Montgomery Scott.
But the challenge is figuring out how much is discounted into the stocks, particularly with media companies facing a wide valuation range, said Wible.
The S&P 500 trades at a P/E ratio of about 17. Viacom trades at the low end at 13 times earnings and others like News Corp at the high end at 17.7.
Some analysts believe near-term share gains will be driven by an ad recovery -- led by resurgent auto industry spending -- that will benefit media networks. Longer-term gains will be tied to views that content will grow in value in an evolving digital landscape.
Advertising growth should stay strong through the next three quarters and into 2011. Last-minute ads are commanding much higher premiums than a year ago and industry watchers believe the upfronts could fetch higher prices.
Morgan Stanley expects U.S. advertising to grow 4 percent this year. The investment bank raised its price target to $42 from $37 for Disney and said the company's ESPN sports television division is expected to benefit from the renewal of its first cable carriage agreements in years.
We haven't been this bullish on the fundamentals in media in quite some time. To some extent, the stocks reflect that but I still believe there's room to go, said David Bank, analyst with RBC Capital.
WHAT'S FAIR VALUE?
Others argue media stocks have already factored in a rebound, that most of the growth is occurring mostly in lower-margin local advertising, and that they are vulnerable longer-term to audience fragmentation -- across growing forms of new media such as on the Web -- which would erode revenue and diminish values for content.
And while the ad market is recovering, it is still rebounding off a low base. Advertising volumes were at their lowest in recent memory in 2009.
Forecaster ZenithOptimedia is bearish, estimating that ad spending this year in the U.S. will shrink even further, dropping 2 percent to $154.5 billion.
The media conglomerates are about fairly valued, said Michael Corty, an analyst with Morningstar.
The stocks kind of shot through what we think they're worth, he said. In general, we think these are solid, attractive businesses with decent growth prospects. And that's kind of priced into the stock.
Barclays Capital singled out Time Warner for moderately slower growth than the group, due to the maturity of its film division and higher content investments.
Others also think Time Warner will grow slower in 2010 than rivals and is near full valuation because it has lower exposure to the ad recovery than its peers and faces ratings challenges at properties like CNN, which could curtail earnings growth.
Time Warner trades nearly in line with the group, despite possibly slower forward growth, Barclay warned in a report.
Nevertheless, Janney Montgomery Scott's Wible has a buy on Time Warner because of its huge content portfolio.
Ratings continue to be a problem for Time Warner but they own a tremendous amount of rights and that will bode well for Time Warner in the evolving digital world, Wible argued.
Several believe Viacom is sharply undervalued after being oversold last year. Analysts cite its huge exposure to advertising, ratings comebacks at its cable networks, MTV and BET, cost cuts at its film studio and expectations for a share buyback or dividend.
Analysts expect earnings of 38 cents a share on revenues of $2.9 billion, versus 29 cents and $2.9 billion a year ago.
Viacom executive chairman Sumner Redstone and CBS Corp CEO Leslie Moonves were upbeat on advertising earlier this week.
Upfronts are looking really positive, Moonves told Reuters on Monday at the Milken Institute Global Conference, referring to the yearly upfront pow-wows taking place in the next few weeks for commercials.
The markets are booming and literally every one of our advertising businesses is up substantially, he said.
(Reporting by Sue Zeidler and Alex Dobuzinskis; Editing by Tim Dobbyn)