Time to pick the stock winners


Barclays Capital analyst Anthony DiClemente believes that a cyclical recovery for US advertising is going to more than offset structural concerns about media companies in 2010 and 1011. But not all media stocks will benefit equally, so he’s been studying the field to pick some favorites.

On the front page of a lengthy research report, DiClemente and associate George Hawkey cited five core arguments for owning media stocks: “1) U.S. advertising appears to be in the midst of or is soon to be on the path of recovery; 2) Pay-TV network affiliate fee growth continues at an impressive rate; 3) Media margins are likely to show outsized expansion once revenues recover; 4) With a very strong industry balance sheet, incremental announcements of return of capital are becoming a greater likelihood; 5) Street media estimates are probably too low.”

They noted that sentiment is improving, with GM launching a new ad blitz. Meanwhile, media stocks are trading at a discount to Barclays “consumer discretionary index,” so they have some upside for stock buyers before they catch up to other sectors like retail and gaming.

“We do believe returns will require better individual stock-picking going forward in light of sector appreciation, and we hope for better insight in identifying individual stock outperformance,” the analysts wrote.

So, after subjecting the universe of media stocks that they follow to 10 categories of scoring, they came up with a list of the stocks most likely to outperform.

Topping the Barclays scorecard was Disney, which was #1 in three of the 10 categories: brand/asset quality; international expansion opportunity; and opportunity for incremental return of capital. DiClemente and Hawkey particularly cited potential upside at ESPN and to margins at the Disney theme parks.

Viacom was next, cited as the most attractive valuation in US media stocks. The analysts are optimistic about a pick-up in the scatter market for Viacom’s cable networks.

Ranked third was Discovery Communications, with potential for domestic margin expansion, momentum for its emerging networks, and ratings gains at its existing networks.

CBS Corporation ranked 4th, seen as benefiting from a US television advertising recovery and continued ratings growth for the CBS Network.

Others cited in the report were News Corporation (currently deeply discounted in its valuation), Scripps Networks (growing fast, but expensive compared to other media stocks), and Time Warner (the weakest of the media stocks that the Barclays analysts track).

RBR/TVBR observation:
Since so many pure-play radio and TV companies are penny stocks these days, they have virtually no Wall Street analyst coverage and are missing from DiClemente’s list. We would suggest that investors who believe in an improving advertising environment also look at some of them to find the ones with the best balance sheets, best management, and the ability to emerge intact from this recession.