* News Corp, Time Warner, Viacom post earnings next week
* Media stocks up 71 pct; 'easy money' may be over
* CBS CEO Moonves sees "growth" in ad market
* Market rally creates currency for deal making
By Paul Thomasch and Yinka Adegoke
NEW YORK, Oct 30 When it comes to the media business, the script
reads that advertising will soon bounce back, a rush of deal making is around
the corner and a smart investor should scoop up cheap stocks straight away.
Certainly, anyone who bought shares of News Corp (NWSA.O) Time Warner Inc
(TWX.N) or Viacom Inc VIAb.N three months ago looks smart today: those stocks
have risen at least 35 percent. CBS Corp's (CBS.N) shares have done even better,
doubling in the last three months.
Next week should help determine whether the run can be sustained, or whether
all the good news is already priced in. After promising that ad spending has
steadied, or even increased, media executives will be under pressure to show
progress on the earnings front in their quarterly reports.
Among them is CBS Chief Executive Les Moonves, who has been particularly
upbeat about recovery prospects. He remains so.
"No question," he said, when asked in an interview this week whether
business has improved. "It is clear that there is some growth in the advertising
"I said the second quarter would be better than the first, the third quarter
better than the second. Without giving too much away, that's exactly the case."
There is already some evidence that ad spending is bouncing back. Google
Inc's (GOOG.O) revenue rose 8.5 percent in the third quarter, for instance.
But there is also plenty of evidence to the contrary. Omnicom Group Inc
(OMC.N) and Interpublic Group of Cos Inc (IPG.N), which own some of the top ad
and media agencies, showed revenue declines of 14 percent and 18 percent,
Wall Street expects Walt Disney Co (DIS.N) quarterly sales to fall 2
percent, Viacom to fall 4 percent and CBS and News Corp to fall 5 percent,
according to Thomson Reuters I/B/E/S.
Beyond third quarter results, said Standard & Poor equity analyst Tuna
Amobi, investors will be keen to hear what executives have to say about 2010.
"The sentiment that has emerged is that the worst may be over," said Amobi.
"The outlook is really less bad as opposed to a significant pick-up in
Since ad spending tends to correlate with GDP growth, much depends on the
broader economy. But the question is how long investors, who bought shares of
media companies in anticipation of an ad comeback, are willing to wait.
During the past five recessionary periods, media stocks have outperformed
the broader market leading up to a recovery, said Bank of America Merrill Lynch
analyst Jessica Reif Cohen.
Since 1973, media stocks on average have bested the Standard & Poor's 500
Index by 72 percent in the six months following a market trough, she wrote in a
"However, in the quarters immediately following a recession, the relative
performance of media stocks significantly cools," she wrote. "With the current
recession seemingly behind us, we believe the easy money in media stocks has
The S&P media index .GSPME is still down 34 percent from its 2007 peak.
But it is up 71 percent from the March lows, while the S&P 500 .SPX has gained
a more modest 55 percent.
Beyond advertising, how media stocks perform in the months ahead will partly
rest on deal making. Historically, few media mergers have worked out: the Time
Warner/AOL deal is the poster child for disastrous mergers.
But that is not keeping media brass and bankers from trying. The most talked
about deal involves General Electric Co (GE.N) selling a stake in NBC Universal
to Comcast Corp (CMCSA.O).
Other deals are brewing, too. Time Warner is in the process of spinning off
AOL; Cablevision Systems Corp CVC.N, which includes cable networks such as AMC
and WE, is divesting its Madison Square Garden unit; and Cox Enterprises is
selling Travel Channel. [ID:nN30424732]
Indeed, the rebound of media stocks has meant management teams now have a
currency with which to make deals, said Scott Singer, an investment banker with
Higher stock prices also mean companies might feel the return on investment
from an acquisition now compares favorably over the return on buying back
Added to that, the loosening up of the debt markets has allowed companies to
refinance and extend debt. That has given media honchos breathing room to
consider deals, said Singer.
"There are various market conditions which are ripe for increased deal
making," said Singer. "We won't see major multibillion-dollar LBOs because the
current senior debt markets can't support that, but we'll see other creative
(Reporting by Paul Thomasch and Yinka Adegoke; editing by Tiffany Wu)