Thanks to quarterly results from two powerhouses of the media business this week, that world is easier to picture. Time Warner Inc on Wednesday posted profit and revenue that beat expectations and raised its dividend. News Corp did the same late on Tuesday.
Investors who bought media stocks 12 months ago made a smart bet. Time Warner shares dipped about 1 percent after its report, but are up about 40 percent in the past year. News Corp shares jumped 6 percent and have doubled from a year ago. Walt Disney Co has climbed nearly 50 percent and CBS Corp and Viacom have more than doubled.
All have outperformed the Standard & Poor's 500.
Still, no traditional media company has solved fundamental problems. Establishing a sustainable digital business remains tough. Publishing is still in decline. As Benchmark Co analyst Fred Moran said, advertising is only getting less bad.
Those challenges and the big run in media stocks suggest that media companies might be too expensive -- yet bulls outnumber bears.
We've recovered from badly beaten-down trading multiples to closer to industry average multiples, Moran said. They are now at the low end of a fair valuation range with the potential to move toward the higher end of that range as they prove out that recovery in their growth rates.
David Joyce, a Miller Tabak & Co analyst, said, There are still going to be some company-specific things that people are paying attention to, but media has been turning the corner.
MEDIA HANGOVER? PERHAPS NOT
At Time Warner, hit movies Sherlock Holmes and The Hangover helped drive net income of $627 million in the latest quarter, reversing a loss of $16 billion a year earlier when it took a big writedown.
Excluding items and discontinued operations, profit rose to 55 cents a share, surpassing the 52 cents analysts polled by Thomson Reuters I/B/E/S had forecast.
Revenue rose 2 percent. That was better than expected for a company that has been slimming down, particularly in a restructuring that included spinning off Time Warner Cable and AOL, the online unit that became part of Time Warner in 2000 in what many consider the worst merger in history.
These were very solid results, said Thomas Eagan, a Collins Stewart analyst who has a buy rating on Time Warner.
We think the company is positioned to steadily increase revenue and cash flow this year, he said. But we also think that, as indicated this morning, it will take excess funding capacity and either invest in the business or return it to shareholders.
Indeed, Time Warner said it would use boost its dividend by 13.3 percent and increase the money set aside to repurchase stock to $3 billion from $1 billion. News Corp boosted its dividend by 25 percent.
I don't think people were necessarily expecting dividend increases or share buyback increases, said Miller Tabak's Joyce. I think it's positive that it's coming now.
A third big media company, Comcast Corp, which plans to buy a controlling stake in NBC Universal, posted stronger-than-expected earnings on Wednesday. AOL for its first quarter after leaving Time Warner also posted results that beat Wall Street estimates.
Together, those performances heighten expectations for Viacom, CBS and Disney as they report in the coming weeks. Their shares were 1 percent to 3 percent higher on Wednesday.
The pressure is on the media companies to show that as the economy and consumer have started to recover, so have ad sales, said Moran.
(Reporting by Paul Thomasch, additional reporting by Yinka Adegoke and Anupreeta Das, editing by Tiffany Wu and Robert MacMillan)