Mergers fail to lift media stocks

Despite consolidation in the sector, media stocks underperformed the broader market in the first half of 2007.

By Paul R. La Monica, CNNMoney.com editor at large

NEW YORK (CNNMoney.com) -- Media stocks, unlike the broader market, have not had a great start to 2007.

On the last trading day of the first half, the S&P Broadcasting and Cable index and S&P Publishing Index are both up just 1 percent versus a 6 percent gain for the S&P 500. The Dow is up about 7.7 percent so far this year while the Nasdaq has risen about 8 percent. What's more, the S&P Movies and Entertainment index is down 1 percent year-to-date.

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The best media stocks of 2007
Some TV and publishing stocks are surprising winners on Wall Street.
Company YTD change
Crown Media Holdings 96.1%
LIN TV 87.0%
Primedia 73.4%
Dow Jones 52.1%
Discovery Holding 42.4%
Liberty Global 40.3%
Sinclair Broadcasting 36.3%
Source:Thomson Baseline, for U.S.-based media companies with a market value of at least $500 million
The worst media stocks of 2007
Music, newspaper and radio stocks lead this year's media laggards.
Company YTD change
McClatchy -41.0%
Warner Music Group -37.0%
Citadel Broadcasting -36.8%
Lee Enterprises -32.1%
Martha Stewart Living Omnimedia -22.0%
XM Satellite Radio -20.0%
Sirius Satellite Radio -14.7%
Source:Thomson Baseline, for U.S.-based media companies with a market value of at least $500 million

Among major media companies, CBS (Charts, Fortune 500), which finished the 2006-2007 television season in first place in overall ratings and second place among 18-49 year-olds, was the big winner. Its stock gained more than 6 percent during the first half.

But shares of rivals News Corp. (Charts, Fortune 500), Walt Disney (Charts, Fortune 500) and Viacom (Charts, Fortune 500) were flat while Time Warner's stock fell nearly 3 percent. Time Warner (Charts, Fortune 500) owns CNNMoney.com.

The weak stock performance overall came even as merger interest in the media sector warmed up. Not surprisingly, some of the group's biggest winners were takeover targets, real or rumored, or companies that are up on the block.

Shares of newspaper publisher Dow Jones (Charts), whose board is weighing an unsolicited $5 billion offer from Rupert Murdoch's News Corp., have surged 52 percent. Rival financial news provider Reuters has jumped about 45 percent this year thanks to a friendly merger with business information company Thomson.

LIN TV has shot up 87 percent. The owner of local TV stations said in May it was exploring alternatives, including a possible sale.

Shares of Cablevision have gained 25 percent so far in 2007 as the company's founding family agreed in May to take the cable operator private.

And CKX, a media licensing company that owns the rights to the names and likenesses of Elvis Presley as well as the rights to the popular "American Idol" television show that airs on News Corp.'s Fox, have surged 18 percent. The company's top executives announced in May that they were taking CKX private.

But not all media stocks have benefited from mergers. Shares of newspaper publisher Tribune, which agreed to be taken private by real estate mogul Sam Zell in April, have fallen 4.5 percent this year.

And despite the fact that satellite radio companies Sirius Satellite and XM Satellite Radio agreed to merge in February, the stocks are among the worst performers in the media sector this year. Sirius stock has tumbled 15 percent while XM stock has plunged 20 percent. Many on Wall Street doubt the deal will win approval from regulators.

So what's in store for media stocks for the rest of the year? Despite a lot of hype about this summer being the biggest ever at the box office, several high-profile sequels have not lived up to expectations, which could lead to weak results from studios in the third quarter.

Still, some of the big conglomerates could benefit from blockbusters later this summer.

Hopes are high that the upcoming "Transformers" movie will lift results at Viacom's Paramount and DreamWorks movie studios, which have already released a string of box office successes this year. And Disney is expected to have a hit with its latest animated movie from Pixar, "Ratatouille," which opened Friday to glowing reviews.

Turning to television, the four major networks, CBS, Disney's ABC, News Corp.-owned Fox and GE's (Charts, Fortune 500) NBC all wound up generating surprisingly strong business in the just-ended upfront ad selling season.

That bodes well for the second half of the year as several of the networks negotiated higher rates for ad time despite a decline in ratings for prime-time television this year as well as a continued debate among advertisers and networks about what ratings measures should be used.

And even local broadcasters are expected to benefit from strong advertising. That's because this year should be a bigger year for political advertising than typical odd-numbered years as candidates in the wide-open presidential race may flood the airwaves earlier than usual since many primaries in 2008 have been moved up to February.

But a big trend that doesn't paint a pretty picture for most media stocks is that growth in overall ad spending is expected to be fairly tepid this year. According to a report from media research firm TNS Media Intelligence, radio and newspaper advertising revenues are forecast to decline this year.

Internet ad spending should be the biggest growth engine, which explains why shares of Google and even the struggling Yahoo have outperformed the stocks of most of the major media companies so far in 2007.

The reporter of this story owns shares of Time Warner through his company's 401(k) plan. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.