Does the media rally have another act?

NEW YORK/LOS ANGELES Mon Mar 1, 2010 12:22pm EST

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NEW YORK/LOS ANGELES (Reuters) - Forget about the advertising slump, depressed DVD sales and all the talk about losing audiences to Facebook or the Wii -- big media is finally attracting some big investors.

In the fourth quarter of 2009, 30 of the top equity-oriented U.S. hedge funds almost doubled their already substantial share holdings of media giants Walt Disney Co (DIS.N), Viacom Inc VIAb.N and Time Warner Inc (TWX.N), according to a Thomson Reuters analysis of regulatory filings.

Among the hedge funds buying major media stocks in the quarter were Chris Shumway's Shumway Capital Partners, Andreas Halvorsen's Viking Global Investors and Stephen Mandel's Lone Pine Capital. Disney and Time Warner were among Shumway's 10 largest disclosed positions.

The stocks have not done much to please the funds so far in 2010. Shares of Disney, Time Warner and Viacom have lost an average of 1.2 percent, matching the 1 percent drop in the Standard & Poor's 500. Last year, Disney gained 42 percent, Time Warner rose 40 percent and Viacom jumped 56 percent.

Competitors News Corp (NWSA.O) and CBS Corp (CBS.N) also registered big gains in 2009, more than 50 percent, but have drifted lower this year.

Behind 2009's rally was a bet that when consumer spending and corporate marketing budgets bounce back -- after one of the worst stretches in memory -- media companies will be sitting pretty. It brought multiples back to what analysts consider more fitting levels.

Indeed, a year ago media companies traded at average price-to-earnings ratios that were 10 percent below those of companies listed on the Standard & Poor's 500 index. Today, there is almost no difference between the two.

Some analysts and investors say the media rally still has legs, noting the shares remain down an average of 20 percent from this time two years ago. Still, they say, investors should be picky as not all media companies remain attractive.

"Expectations are that advertising is coming back," said Christopher Marangi, senior analyst at money manager Gabelli & Co, a big media investor. "That along with consumer purchases and some operating leverage should lead to some good financial results for most of the large media companies."

"But certain segments continue to face challenges and it's important now to look case by case," he said.

The "smart money" hedge funds are buying into the larger consumer recovery case as well. The consumer discretionary sector, which includes many media companies, but also retailers and restaurant chains, attracted about $9 billion from the 30-fund "smart money" group in the fourth quarter, according to the analysis. Only financials pulled in more dough.

At the same time, the "smart money" funds were pulling money out of health care and telecommunications stocks.

The group includes the 30 funds with the largest disclosed equity portfolios in fourth-quarter securities filings excluding those with more than 200 stocks to eliminate rapid-trading quantitative funds.

Viking declined to comment. Shumway and Lone Pine did not return calls for comment.

AD RECOVERY STILL IN EARLY STAGES

So far, evidence of a rebound in spending on radio spots, TV commercials or billboards is largely anecdotal, stemming from comments by executives like CBS CEO Les Moonves.

Indeed, 2009's big rally came against a backdrop of a 10 percent decline in U.S. ad spending. Some improvement showed up in the fourth quarter, but not much.

Fourth-quarter revenue at CBS, Disney, Time Warner and Viacom ranged from down 3 percent to up 3 percent from a year earlier, when the credit crunch had killed spending on just about everything, especially advertising.

Only News Corp showed a significant jump, with fourth-quarter revenue up 10 percent. Even there, though, the biggest increases came from its film and book division, neither of which depends on advertising.

That may give pause to investors. What would happen to share prices if ad spending fails to recover in 2010? Or 2011?

That's certainly possible. One closely watched forecaster, ZenithOptimedia, estimates that ad spending this year will drop 2.6 percent in the United States. It should rise next year, but only by 1.6 percent.

Cowen and Co analyst Doug Creutz is among those cautioning that the "continued distress" of consumers could weigh on ad spending, and figures media companies are about fully valued.

Changes in the media landscape are also cause for concern.

So-called new media, everything from video games to social networks like Facebook, is drawing both audiences and ad dollars away from the more traditional entertainment. How big is the threat to the establishment? Ask any music executive.

But some analysts say there is plenty of reason for optimism. Morgan Stanley's Benjamin Swinburne, who expects advertising to grow 4 percent in 2010, figures media will outperform the broader market.

"In 2010 we are still looking at early to mid-cycle earnings, by no means are we near a peak for media," he said.

However, investors should not consider media stocks in broad brush strokes, said Edward Jones analyst Robin Diedrich.

"Last year, we definitely had a general reversal in the market overall and in these stocks in particular -- just on the realization that the sky wasn't falling," she said.

And today? "Investors need to take a harder look at individual stocks," she said, pointing to Viacom, Disney and Scripps Networks Interactive (SNI.N), owner of HGTV and Food Network, as the smartest bets among media.

"At this point, we think it's about stock picking."

(Reporting by Paul Thomasch in New York and Alex Dobuzinskis in Los Angeles. Editing by Robert MacMillan)

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