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Street bullish on media

Media stocks up nearly 11% year-to-date

It is good to be a media investor in 2011, at least so far, as returns on stocks in the biz are more than double the gains in the broader market.

Steady advertising spending and a perception that media companies face less exposure than other corporations to turbulent world events over the last several months have investors bullish on the industry, say Wall Streeters.

As the end of the first quarter approaches, media stocks are up nearly 11% year-to-date, according to the Bloomberg Media Index comprising 36 stocks, vs. about 4% for the Standard & Poor’s 500 Index.With a 31% bump, the biggest gainer was CBS, which continues to report double-digit ad gains while CEO Leslie Moonves projects that retransmission fees at the company could top $2.5 billion some day as another revenue stream. He’s also been quick to point that its deep library presents all kinds of new opportunities as demand for content grows in the digital era.

With more exposure than many of its counterparts to advertising, which accounts for two-thirds of its revenue, CBS was hit particularly hard in the downturn, so it has benefitted disproportionately from the recovery. What’s more, the Eye’s long-term investors are apparently not sweating the seemingly endless Charlie Sheen controversy saturating headlines.

In Street-speak, media are considered to be part of an investment category called “consumer discretionary,” which also includes such industries as retail and restaurants. Within that category, investors see media as “late stage recovery plays” as the economy pulls out of recession. That’s one reason why stocks have performed so well.

The other, said David Bank, an analyst with RBC Capital Markets, is fundamentals: Media companies are reporting solid financials.

In addition, there is less of an overhang today on the stocks from fears of cord-cutting, the phenomenon in which people are said to be dropping TV to watch shows on services like Hulu and Netflix instead. The number of TV subscriptions, helped by gains at satellite companies and telcos, actually grew in 2010.

Netflix itself has been a winner so far this year, with shares up nearly 30%. Despite the recent decisions by Showtime and Starz to hold back some shows from Netflix, RBC’s Bank thinks the streaming service may be thought of now more as a frenemy than an enemy, as a new source of funds for content.

One disappointment is Discovery Communications, one of two publicly traded, pure-play cable channel companies. Discovery’s shares are off 5% this year; Wall Street, Bank believes, doesn’t think the cabler is doing enough to return capital to shareholders in the form of share buybacks or dividend boosts. He doesn’t think early disappointment in viewership at Discovery’s joint venture with Oprah Winfrey, the OWN channel, has anything to do with the decline. “That is more a sentiment issue than a numbers issue,” he said.

Tough year for DWA

DreamWorks Animation, too, has had a tough year so far, with shares down more than 11%. “Megamind” wasn’t a big B.O. earner last fall, and its DVD isn’t expected to be a big moneymaker. In addition, the “Shrek Forever After” DVD underperformed. DreamWorks only has a “Kung Fu Panda” sequel in May and “Puss in Boots” in November, while it released three movies last year.

When it comes to various international crises, media congloms seems fairly insulated from those events except, of course, for Sony, whose shares are down 9% this year. Investors don’t see a great deal of exposure to commodities, such as oil and food, where there has been some inflation recently.

One company that may feel the pinch from rising oil prices, according to Janney Capital Markets analyst Tony Wible, is Disney as consumers may pull back on car trips to theme parks this summer.

The next benchmark for media will be the upfronts this spring. The question is whether advertisers, fearing more inflation is down the road, will pull back on their spending.