Media gains rest on shaky ground as earnings near

The main gate of entertainment giant Walt Disney Co. is pictured in Burbank, California May 5, 2009.

LOS ANGELES (Reuters) - Investor confidence in U.S. media companies, whose results this year have done little to inspire a near doubling in share prices since March, will be easily shaken by any sign during the upcoming earnings week that advertising declines are worsening.

Media executives observed last quarter that horrendous declines in ad prices and sales appeared to be stabilizing though buyers and consumers remained cautious.

Share prices for the sector rose on that assessment and on some analysts' view that media firms, while no longer growing briskly, were still a good investment and priced too low.

Some analysts are finding media shares attractive despite the huge gains of the past quarter, but others are unconvinced that advertising has ended its free-fall.

"We seem to have stabilized at a very weak level," Pali Capital analyst Rich Greenfield said.

Investors also will assess the health of the companies' underlying business in what has been a time of mixed signals.

The first upfront, or advance, ad sales by General Electric Co's NBC Universal, came in at prices that beat forecasts for deep declines, the network's executives said, boding well for the higher rated ABC, CBS and Fox networks.

But major advertisers like General Motors and Chrysler have emerged from bankruptcy with less money to spend on marketing, and concerns remain about consumer spending.

Shares in the five largest U.S. media corporations have gained at least 75 percent since March 9, roughly twice the 39 percent growth the Dow Jones Industrial Average managed.

Those gains did not dissuade Barron's or Morgan Stanley Research from upgrading the sector last week -- looking past the downturn to a slower growing but stable media industry.

"The reality is that the best-managed media and advertising stocks are unwarrantedly cheap," Barron's said in a report last week. "If the media economy merely muddles through the next few years, new investors in it will have fatter wallets."

Morgan Stanley Research upgraded the sector to "attractive" from "in-line" on the view that TV viewership, earnings and ads sales would improve markedly in 2010, and that companies with cable assets would reap stable subscription fees.

THE QUALITY OF THE NUMBERS?

Walt Disney Co leads the sector in estimated 2010 price/earnings, with a ratio of 14.1, compared to 12.7 for News Corp, 12.4 for Time Warner, 10.6 for Viacom and 10.4 for CBS, Reuters Estimates showed.

Amid the uncertainty, some analysts favor the Disney, which reports third quarter results on Thursday and is seen by some as being more resilient to the ad downturn because of a portfolio that includes theme parks and cable networks.

Analysts expect Disney to post net earnings of 52 cents per share, compared to 66 cents in 2008, Reuters Estimates showed.

Caris & Co analyst David Miller, who rates Disney shares "above average" and has a 1-year price target of $30, sees it as better integrated, with a healthier balance sheet and less exposure to the worst effects of the downturn than rivals.

But other analysts point to signs of weakness. Disney has extended some dining discounts at its U.S. theme parks through year's end in a sign that consumer spending needs propping up.

Disney theme parks are seen as a bellwether of consumer sentiment, as vacationers plan trips weeks or months ahead. Miller and others say park revenue will drop in the quarter.

Greenfield, who has a "sell" rating on Disney shares, said his "big concern" for the quarter is whether Disney Chief Executive Bob Iger and the heads of Viacom and Time Warner will maintain their position that declines in advertising-driven businesses have stabilized.

Viacom and Time Warner also report earnings this week.

Wall Street is looking for net earnings of 37 cents per share from Time Warner, versus 66 cents per share a year ago, and for 48 cents net EPS from Viacom, down from 64 cents per share a year earlier, Reuters Estimates shows.

Greenfield is "neutral" on Viacom and says he will be listening for more on the planned launch of its cable channel joint venture, Epix, which he has criticized as "a mistake."

Miller rates Viacom "underperform," his next-to-worst rating, with a 12-month price target of $17.

"The stock has gotten ahead of where I think the fundamentals are," Miller said. "I don't think the quality of the numbers is going to be great at all."

Greenfield advises a "buy" on Time Warner shares but wants more details on its ailing AOL business and whether the online subsidiary's new management team "has been able to breathe new life into it" as "more important than the numbers."

CBS and News Corp, which report earnings next week, are expected to post sharply lower profits as a result of their greater exposure to the ad downturn. News Corp is expected to post fourth-quarter net earnings of 18 cents per share versus 43 cents. CBS's net EPS is expected to be 9 cents, compared to 61 cents per share a year ago.

(Reporting by Gina Keating; editing by Leslie Gevirtz)