Big media stocks' big run faces test this quarter

Only Viacom suffered from its ratings decline, lags its peers

Big media companies' stocks have their swagger back.

A boom in political ad spending and bigger checks from cable and digital providers have driven up the stocks of Comcast Corp , Walt Disney Co , News Corp and CBS Corp , with their gains so far outpacing the broader market this year.

Those names have jumped between 15 percent and 32 percent, with Time Warner slightly trailing them, but still up a healthy 7 percent.

In comparison, so far this year, the Dow Jones industrial average is up 3.8 percent and the Standard & Poor's 500 is up 6.4 percent.

Only Viacom , which has suffered from ratings declines at some of its cable networks and a bruising battle with DirecTV over distribution fees, lags its peers. Its stock has been about flat since January.

"We call them our sleep-well-at-night cyclicals," RBC Capital Markets analyst David Bank said of the media giants.

A stable ad environment and stock buybacks have bolstered big media companies' stock prices this year, he said.

The big media conglomerates start reporting results next week. Analysts on average expect earnings-per-share gains of between 2 percent and 26 percent, according to Thomson Reuters I/B/E/S. CBS is at the low end of that range while Disney, Comcast and News Corp occupy the high end.

The rally in big media stocks marks a sharp turnaround from 2008 and 2009, when the advertising market and media companies' shares took a beating after corporations cut ad budgets during the recession. Me d ia shares started to rise in late 2009 and early 2010 as ad spending rebounded.

The ad market has remained resilient despite the gloomy global economy. This is one reason why big media's stock prices are on a tear. While the ad marketplace has shown some signs of softening, both broadcast and cable television advertising "remain generally solid on the national level," Cowen & Co. analyst Doug Creutz said in a note to clients.

CAMPAIGN GOLD

As is typical in an election year, the explosion of political ads is likely giving a lift to media shares, said Bill Carroll, vice president of programming for Katz Television Group, which advises stations on programming choices.

Political ad spending is even bigger than usual this year. For the first time, political action committees known as SuperPACs can spend unlimited funds to support their causes or candidates. They are pouring cash into TV commercials ahead of the presidential election in November. And SuperPacs pay the going rate, unlike candidates who get the lowest ad rates available.

"They're paying the same rate as McDonald's," Carroll said , a dding that this can mean "a lot of spots for a station."

Horizon Media research analyst Brad Adgate predicted that this year will mark "the longest and most expensive political season to date."

But he added, "Come November 6th, it's all going to dry up."

CONTENT IS KING

The big media conglomerates' stock prices have also gained despite concerns that new entertainment options on the Internet would hurt them, said Lazard Capital Markets a n alyst Barton Crockett.

"These guys have been able to deliver their performances in the face of a wall of skepticism," said Crockett, who sees more room for stock prices to rise.

He has "buy" ratings on News Corp, Time Warner, Disney and Viacom.

Crockett added that producers of television shows and movies are negotiating higher fees from cable and satellite providers, while new revenue is streaming in from online players because content is in such demand due to all the new distribution platforms.

"You're getting checks from Amazon and Netflix , and you're getting more money from DirecTV and Comcast. That's a nice combination for the entertainment conglomerates," Crockett said.

New online players, including a coming joint venture between Coinstar Inc's Redbox and Verizon Inc , also need content to build their services.

Even with this year's gains, many media companies' stocks still trade at relatively low levels compared with earnings, said John Miller, a portfolio manager at Ariel Investments, which holds shares of CBS Corp and Viacom Inc .

"Valuations are quite attractive," Miller said. "These companies generate a lot of free cash flow. They can take advantage and either repurchase shares at ridiculously low valuations or pay a sizable dividend."

A SKEPTIC'S WARNING

But at least one Wall Street analyst, Michael Nathanson of Nomura Securities, is warning bullish investors that coming results may disappoint.

Nathanson said he expected the 6.5 percent increase for national broadcast and cable network advertising revenue garnered in the first quarter to fall to a 2.2 percent increase in the second quarter.

This month, Nathanson reduced second-quarter earnings estimates for most of the big media companies, including Time Warner, Viacom and News Corp . He raised estimates for Disney.

"In order to fuel the rally further, earnings numbers need to start moving up, yet we do not see the scope for positive earnings revisions," Nathanson said in a note to clients.