Ad rebound plays well for media companies, for now

NEW YORK (Reuters) - From Walt Disney Co DIS.N to Time Warner Inc TWX.N, the media business is looking a little less glamorous these days.

After an impressive run in big media stocks -- most are up between 20 percent and 40 percent in the past year -- concerns are spreading that an advertising recovery that looked so promising only a few months ago could stall out.

There’s little doubt advertising has improved. Nearly all the major media companies, which typically count on advertising for 30 percent to 70 percent of sales, should show revenue growth in quarterly results over the coming days.

But the increases are hardly jaw-dropping: News Corp's NWSA.O revenue is expected to rise 3 percent, while Time Warner, Disney and CBS Corp CBS.N are expected to post increases in the neighborhood of 1 percent, according to Thomson Reuters I/B/E/S.

Those sorts of numbers could make further share gains tough to justify, analysts said. After all, in the last three months, News Corp is up 12 percent, Viacom is up 17 percent and CBS is up 15 percent. Time Warner and Disney have posted more down-to-earth gains of 4 percent and 7 percent, respectively.

“There has been an ad recovery,” said Morningstar Inc. analyst Michael Corty. “But generally speaking, the stocks are fairly valued at this point. Quite a bit of the good news has been factored into the share prices.”

The wild card is 2011. If the job market improves and housing shows signs of life, consumer sentiment would likely perk up, providing a healthy measure of confidence to companies thinking of new campaigns to market sneakers, peanut butter or laptops.

But that’s a long shot, according to most media analysts and advertising experts. Instead they see an ad market that is healing slowly.

"If you think of this as a roller-coast ride, we're on that long stretch where you hit the little bumps," said Tim Jones, Chief Executive of ZenithOptimedia North America, a division of Publicis Groupe SA PUBP.PA .

A major media services agency, ZenithOptimedia is projecting an increase in U.S. ad spending in 2010 of 2.2 percent. It sees 2011 spending up a similarly modest 2.4 percent to $155 billion -- a long way from $177 billion spent before the downturn in 2007.

Jones said it could be several more years before spending returns to pre-recession levels.


There are positive signs in the ad market, however, particularly out of critical categories such as autos and financial services. What is more, television spending appears to be recovering faster than magazines, newspapers, billboards or radio.

“When you look at advertising, I’m very bullish on TV and cable advertising. The notion that everything goes to the Internet is naive,” said Matthew Harrigan, an analyst with Wunderlich Securities. “That being said, you can’t get around the reality. People are still nervous about 2011.”

Beyond advertising, U.S. box office revenues were slightly better for the media business in the third quarter, rising about 5 percent from a year ago, according to Michael Nathanson, an analyst with Nomura Securities.

While Disney, with the strength of “Toy Story 3” will be one of the winners, News Corp’s studio results could be vulnerable after so-so performances “The A-Team and “Knight and Day” over the summer.

Home entertainment will again be a trouble spot for the media companies, with DVD sales in a long decline. Here, again, Disney should be the bright spot with strong sales of “Iron Man 2,” making it the exception in a quarter when Nathanson expects all of the other studios to post lower home video sales.

Overall, according to Thomson Reuters I/B/E/S, Disney is expected to post earnings of 47 cents a share on revenue of $9.97 billion; News Corp is expected to earn 24 cents a share on revenue of $7.42 billion; CBS is looking at earnings of 31 cents a share on revenue of $3.36 billion; Time Warner is forecast to earn 54 cents a share of $6.41 billion in revenue; and Viacom is likely to post earnings of 69 cents a share on revenue of $3.29 billion.

Additional reporting by Jennifer Saba; Editing by Derek Caney