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Big mess for big media
Disney, News Corp., Time Warner and Viacom have been market dogs this year. Can they recover?
October 3, 2005: 12:59 PM EDT
By Paul R. La Monica, CNN/Money senior writer
Media malaise: The four leading media and entertainment stocks are all having a rough year.
Media malaise: The four leading media and entertainment stocks are all having a rough year.
Media discount
Major media stocks look reasonably valued considering their growth.
Company2006 P/E06 Est. EPS Gr.LT Est. EPS Gr.
Time Warner20.616%11%
News Corp19.521%15%
Walt Disney16.216%14%
* based on data as of 9/30/05

NEW YORK (CNN/Money) - It's true. There is a liberal bias when it comes to the media... many investors are biased against big media stocks this year and they have liberally sold their shares.

The stock prices of the four major media and entertainment firms Walt Disney (Research), Viacom (Research), News Corp. (Research) and Time Warner (Research) -- are down an average of 11.2 percent through the first three quarters of 2005. The S&P 500, by way of comparison, is up 1.3 percent.

There are several reasons why all four stocks have been weak this year, such as concerns about a sluggish advertising market for many traditional forms of media, the Hollywood box office slump and slowing sales of DVDs.

What's more, many investors appear to be more attracted to the supercharged growth prospects of pure play Internet media companies like Google (Research) and Yahoo! (Research)

Hope springs eternal...

Still, some professional investors are starting to think that the sell-off in the media sector has been overdone.

Despite all the short-term concerns, analysts expect the four leaders to post earnings increases of at least 16 percent in 2006 and more than 10 percent annually for the next few years. Yet, the stocks all trade in a range of 16 to 21 times 2006 earnings estimates.

That's only a slight premium to the broader market multiple of about 15.6 even though earnings for the S&P 500 are only expected to be up 7 percent next year and 9 percent over the next few years.

"High quality media companies are doing well fundamentally but have done poorly in the stock market. That's not something that can last forever. At some point, it will turn," said Henry Berghoef, director of research with Harris Associates, a money management firm that owns shares of all four companies in several of its Oakmark family of funds.

But it's hard to pinpoint when that will happen. If concerns about advertising growth and movie ticket sales persist for the remainder of the year, it is tough to imagine a fourth-quarter rally for the group. So investors will need to be patient.

"The big media players will ultimately have higher stock prices but it's getting out from all these challenges both on the advertising side and the content side that is causing some stagnation in the shares," said James Goss, a media analyst with Barrington Research.

In addition, skyrocketing oil and gas prices and weak consumer confidence could also be weighing on the media sector since they, like retailers, are largely subject to the whims of economic cycles. To that end, shares of many retailers, including Dow components Wal-Mart (Research) and Home Depot (Research), are down more than 10 percent this year as well.

"You have to look at media stocks versus other consumer cyclicals. This has been a difficult market for any consumer company with high energy prices," said James McGlynn, manager of the Summit Everest fund, which owns all four of the major media stocks.

...but the big four all have pressing concerns

The four media titans also face their own unique challenges, which may make it tough for them to mount a comeback anytime soon.

News Corp. is embarking on an ambitious Internet acquisition spree in order to spur growth. But some are worried about the price tag.

"Media companies need to look more to the Internet but the question is how much you pay for that?" said Berghoef.

Disney is now under new leadership as Robert Iger has officially taken over for Michael Eisner. And although its ABC television unit has enjoyed a turnaround, some investors are worried about a slump in Disney's movie business. As such, the company will soon need to decide if it should make nice with Pixar (Research) or go it alone in computer animation.

Time Warner, which owns CNN/Money, is facing pressure from shareholder Carl Icahn to spin off its entire cable business and boost its planned stock buyback to $20 billion. Time Warner CEO Richard Parsons wants to sell only a small portion of the cable unit to shareholders and repurchase $5 billion in shares.

In addition, there has been rampant speculation about the future of Time Warner's AOL Internet unit. According to several reports, there has been talk about some sort of joint venture with Microsoft's (Research) MSN.

Goss said it has been encouraging that the market has been paying more positive attention to AOL again but that the cable/buyback question will probably continue to be the focus of debate for Time Warner investors.

He thinks that a larger spin-off of the cable unit than currently proposed by Parsons would probably work but that a much larger buyback of Time Warner shares might not be a good idea since it would probably lead to Time Warner taking on more debt.

Finally, Viacom is set to split into two companies next year, one that will own the more rapidly growing cable companies like MTV and Nickelodeon and movie studio Paramount and another that will house slower-growth units CBS, the Infinity radio and outdoor advertising group and book publisher Simon & Schuster.

McGlynn said that the Viacom split makes sense but that it probably won't have an impact on the stock until it actually happens. He believes more growth-oriented investors will scoop up the shares of the new Viacom while value investors will be more attracted to the CBS stock.

So when all is said and done, perhaps the biggest problem for media companies right now is that there are simply too many moving parts. And while having many divisions may help to minimize risk, it could also make it harder for the market to properly recognize when things are going well. With that in mind, a successful Viacom split could lead to more restructuring at the major media firms.

"Big media companies do generally provide a balance and some diversification that provides greater stability," said Goss. "But they are complex companies and maybe that complexity sort of offsets some of their strong values."

For a look at winners and losers of the third quarter, click here.

For more media and entertainment stocks, click here.

Barrington's Goss owns shares of Viacom and Time Warner but his firm has no investment banking ties to the companies.

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

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