With radio and television stocks up so much this year from being beaten down so badly, the question now is when will the rally end? Well, analyst Marci Ryvicker at Wells Fargo Securities is telling clients that if they haven’t bought back in already, they may have waited too long.
Not that Ryvicker has turned negative on the broadcasting business. She’s expecting revenue growth for both radio and TV in 2010. But considering how much broadcasting stocks have recovered this year already, she questions how much upside remains in the near-term.
“The broadcast stocks have rallied since April,” Ryvicker noted. “Since March, radio stocks are up 324%, television stocks are up 327% and outdoor stocks are up 472%, significantly outperforming the S&P 500, which is up 63% over the same time period. The initial run in the stocks was due to the resolution of balance sheet issues as various companies on the verge of potential default received amendments/refinancings, etc. providing substantial covenant flexibility. Performance was further buoyed by significant cost cuts coupled with stabilization (and eventual improvement) of top line declines,” she said in a research note.
The analyst spelled out five reasons to believe the rally should cool:
1) Investor expectations regarding fundamentals are much higher now than they were just three months ago as “less bad” is no longer the primary reason for new money to pour into the space.
2) Many investors who were “chasing performance” have already locked in their gains.
3) Short interest continues to decline, resulting in less volatility.
4) Valuation is still beneath historical lows but has become less “compelling” versus the “bottom” we saw in March/April.
5) The “cyclical wave” has played itself out – we are now waiting for non-comp driven fundamental improvement.
“In sum, the media rally appears to be over – although investors would still rather be net long than net short and would re-enter the space in a pull-back,” Ryvicker advised.
As for her favorite stocks in the sector, she continues to rate CBS Corporation “outperform.” For investors wanting to own pure-play names, her favorites from the group she rates “market perform” are Entercom in radio and LIN in television.
RBR-TVBR observation: This rally has been so hot that it has too cool off at some point. As we noted at the end of Q3, the RBR Radio Index had gained 292% at that point for 2009 and the TVBR Television Index 350% – and both have moved up even more since then.