News Corp. is Wall Street’s absolute darling, Lionsgate the company most radically transformed, and Walt Disney a must-have stock for the second half of 2012. The sector’s overall strong perf in the first six months was marked by an unusually wide gap between winners and losers as Viacom faced Nickelodeon woes and Time Warner its own ratings challenges.
Five core showbiz stocks — News Corp., Walt Disney, CBS, Viacom and Time Warner — rose about 15% on average in the first half, well outperforming the benchmark S&P index, which was up 6%.
The group has beaten the S&P for three consecutive years, said analyst Alan Gould of Evercore Partners. News Corp. surged 25%, with a good chunk of that gain in the last week of June after a decision to split publishing and entertainment. CBS shot up 18%. Viacom Class B shares only rose 4%, while Time Warner fell 5%.
That’s an uncharacteristically large split for the sector, highlighting a diversity of assets, management and responses to an evolving digital landscape.
Aggressive stock buybacks, dual revenue streams and digital coin kept all the stocks in favor despite disparities in operations and growth.
Lionsgate, not yet in the top tier but possibly on its way, showed the biggest jump as shares skyrocketed 77%. The company transformed itself in the first half through the acquisition of Summit Entertainment and the launch of “The Hunger Games” (the pic will be out on homevideo in August). The TV biz has taken flight with “Anger Management.” “The Twilight Saga: Breaking Dawn — Part 2” opens in November. The stock is at $14, and Gould has an $18 price target despite its run-up.
“Lionsgate went through the greatest transformational structural change,” said David Bank of RBC Capital Markets, shifting from an uncertain, hit-driven company to one of franchises and more predictable earnings.
News Corp. suddenly became everyone’s favorite stock after bowing to investor pressure to split. Chairman Rupert Murdoch insists he’s creating two new, first-in-class standalone companies. The Street sees it as sloughing off the troubled newspaper publishing biz and embraced the deal ecstatically.
News Corp. has been perennially undervalued because of its papers, but also from the so-called Murdoch discount — referring to a CEO who did what he pleased without taking investors into account. That seems to have changed.
Comcast, still considered a cable company by showbiz analysts, shot up 31% in the first half. The entertainment assets, led by NBCUniversal, are still lagging but aren’t a primary driver of revenue or earnings. “It’s the tail wagging the dog,” Bank said. Time Warner Cable rose 36% last half, and stock gains among video providers sector were generally robust. Only Cablevision remains solidly out of favor with Wall Street.
Wall Streeters’ other top pick is Disney, which followed a massive “John Carter” flop with a record-breaking turn in “The Avengers.”
“I would say we probably failed, and the market failed to realize, just how much of a game-changer ‘Avengers’ would be,” Bank said. “How it would give a clarity and a seemingly guaranteed consistency to the studio performance over the next few years, which hasn’t been the case.” Coin from the first film and sequels to come will flow beyond the box office.
“Wall Street doesn’t care so much about studios. But Disney is a rare example where it’s more, because of franchises for parks and products, almost like ‘Harry Potter.’ The market is willing to pay up for a ‘Harry Potter’ franchise,” added Todd Juenger of Bernstein & Co.
Some take a more cautious outlook on CBS given the company’s relatively greater exposure to advertising in an uncertain economy, while acknowledging its success in programming, digital distribution deals and the fact that it is less ad dependent than ever before.
“I think most people looking at advertising-related businesses have to have some pause given the economic outlook,” said Michael Nathanson of Nomura Securities. The U.S. economy is still wobbly and continues to be buffeted by European ills.
Others are sanguine on the Leslie Moonves-run company. “They say what they are going to do and they do it. The market has a lot of confidence in it,” Juenger said.
“This is a brand-new CBS. It’s not as ad skewing,” said Bank, as retransmission fees and coin for TV programming both ramp up.
Sister company Viacom has more glaring issues, although many analysts like the stock because it’s cheap.
“There don’t seem to be any near-term catalysts. The key is when do (Nickelodeon) ratings turn around?” Gould said. Year-on-year comparisons for Nick will start getting easier in September, which is when they dropped precipitously last year. “Then the rate of change goes from negative to flat,” he noted. The concern is that a decline in ratings could reduce advertising and affiliate fees and, as Juenger suggested, even raise the specter that operators could drop the network.
“Some people believe it’s the cheapest stock,” he said, but there’s risk “because who knows if and when things will get better. (It’s) been getting 9%-10% affiliate fee growth every year for many years. If that comes into question, it will weigh on the stock.”
He also slammed Paramount’s sparse slate this year, which lowers its homevideo pipeline and does nothing for the library. “It’s not how you build Paramount for the longterm,” he said.
Others were more generous. MTV had a bad ratings spell a few years ago — although not down 30% like Nick’s — and that turned around after “Jersey Shore” and some revamped programming. Nick has hundreds of hours of new programming teed up for September.
“I think Nick is facing the perfect storm,” Gould said: competition from the Disney Channel, measurement issues, cannibalization from Netflix.
Nathanson’s also a perfect-storm proponent. “Weather, measurement, competition, indeed, some changes in behavior all came together this autumn,” he said.
As for Par, “They are retooling it to make it more successful, and the bar is pretty low at Paramount, and I think it’s a turnaround story in progress,” Bank said.
Time Warner’s stock faces the second biggest headwinds as ratings at TNT and CNN continue to struggle. “The Big Bang” on TBS “was a far greater success than we would have expected…but they still have TNT. I think if you turned TNT, the CNN issue would seem less important,” Juenger said. ” ‘Dallas’ is a start in the right direction, but it’s an hour a week and atypical of new programming there,” Bank said.
“Obviously it’s not a good thing to be going up against 10 years of ‘Harry Potter’ films,” added Juenger. Viacom Class B shares only rose 4%, while Time Warner fell 5%.
The HBO story is complex longterm, he said. “They have to raise subscribers counts or raise prices or reduce expenses.” He speculated the networks could drop a studio deal in 2015 when contracts expire. “They don’t need three output deals. Maybe they could drop Fox or Universal,” he speculated. “Or maybe not, because I don’t know if they want Netflix to have it. Or they could hang onto the deals but make them smaller.”
All agree the future of entertainment these days is certainly exciting. “I love this group,” Bank said. “The stocks are cheap. We are in the first inning of content monetization,” plus affiliate fees and retransmission consent. “Those are contractual, not macro-driven. It’s a fabulous time to be a media company.”