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RPT-PREVIEW-Big media stocks rally; will business follow?
November 2, 2009 / 3:42 PM / 8 years ago

RPT-PREVIEW-Big media stocks rally; will business follow?

* 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 (Reuters) - 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 market.

“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, respectively.

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 activity.”


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 note.

“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 been made.”

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 Bank Street.

Higher stock prices also mean companies might feel the return on investment from an acquisition now compares favorably over the return on buying back stock.

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 transactions.” (Reporting by Paul Thomasch and Yinka Adegoke; editing by Tiffany Wu)

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