Barclay’s Capital analyst Anthony DiClemente has turned at least a bit bullish on media stocks, upgrading his sector view and raising his estimates for several of the companies he follows. He even added another media stock to his “overweight” (buy) list.
“Why are we doing this now? In July 2008, we cited structural concerns for the movie/ TV studios as well as a deteriorating economy as reasons for our caution. Since then, the economy worsened faster than we imagined, structurally weak media segments disappointed, and the stocks underperformed. We now find ourselves at an inflection point. We believe a cyclical recovery for U.S. advertising will serve as an offset to well-known structural concerns in 2010/11. Consensus rule of thumb is that an upturn to positive advertising growth happens two to three quarters after the end of a recession. But in light of their historically depressed valuation multiples, we think media stocks will anticipate this recovery. And, the power of positive operating leverage for ad-based businesses that have permanently cut costs will become more transparent in the second half of 2009. Media stocks are inexpensive relative to the market and other U.S. consumer discretionary stocks, and we can no longer justify that discount, especially for cable TV business models which are a larger part of media profits (about 60% of the total) than ever before,” DiClemente told clients.
On a macro-economic basis, the Barclays Capital Economics team is now forecasting that GDP growth will be at a rate of 2% in Q3, 3% in Q4 and 2.8% in 2010. “History tells us that in years of accelerating GDP growth, advertisers naturally spend more,” DiClemente said.
“As such, TV advertising growth is more than likely in 2010. We are raising our TV advertising estimates for 2010 to +4.0% for Broadcast TV and +5.5% for Cable TV, up from -1% and +2%, respectively. Cable TV is the only advertising category that has taken hare of U.S. Advertising in every year since 1980, the year Cable TV was born as a measured advertising medium,” the analyst wrote.
Here are the changes he has made to his ratings and estimates: DiClemente has upgraded his view for the Entertainment Sector to “2-Neutral” from “3-Negative”; He has upgraded Viacom to “1-Overweight” from “2-Equal weight”; He has upgraded CBS Corp. to “2-Equal weight” from “3-Underweight”; And he has raised his target prices for Time Warner, News Corp. and Scripps Networks. The analyst reiterated his “1-Overweight” ratings for both Disney and Discovery Communications.