Betting on media stocks last year was about as smart as putting money on CBS News to call the Presidency right on election night. They got roughed up almost as badly as tech stocks. But while techs have yet to stage a comeback, many media stocks are now basking in the spotlight (table). So far this year, despite a much slower advertising market, the Bloomberg U.S. Media Index is up 13%, compared with a 15.6% drop in the Nasdaq Composite Index and the 5.4% decline in the Standard & Poor's 500-stock index.
What's the deal? Media analysts contend that the stocks were way oversold after the Nasdaq crash, largely because of the collapse in dot-com advertising, as well as investors' misperception that the fate of media companies was the same one facing telecoms and Internet companies. "Media was the baby that was thrown out with the bathwater," says Christopher Dixon, media analyst at UBS/PaineWebber. But now, he says, investors are realizing that many media companies have solid fundamentals, attractive valuations, and the most benign regulatory environment in years.
These days, many media companies are affected much less by advertising slowdowns. Indeed, two distinct classes have emerged: large, diversified outfits, such as AOL Time Warner Inc. (AOL ) and Viacom Inc. (VIA ), that depend less on advertising revenues, and pure-play media companies, such as newspaper giant Gannett Co. (GCI ) and radio powerhouse Clear Channel Communications (CCU ), that are much more exposed. It's mainly the diversified companies that analysts find attractive now. "These companies have stable operating results and big consumer demand," says Dixon.
A prime example is AOL Time Warner, which has Internet, broadcasting, cable, and print operations. Because many of its services are subscription-based, advertising accounts for only around 25% of revenues. Jessica Reif Cohen, media analyst at Merrill Lynch & Co., is high on the stock for next year, "because the merger is all starting to come together." Cohen's favorite stock right now, however, is Viacom--which she says has a tremendous asset base, great brands, great management, and an impressive balance sheet. It's trading around $56, or 30% off its 52-week high. Viacom operates MTV and Nickelodeon; it owns CBS and UPN and operates 184 radio stations. It also owns Paramount Pictures and is a publisher. Viacom's exposure to advertising is about 45% of sales. Once the ad market turns, analysts say, the stock could gain 20% or more. Viacom trades at 13 times next year's projected cash flow, vs. a typical 16 times for media conglomerates.
MULTIFACETED. Liberty Media Group (LMG.A), which has video, communications, and Internet businesses, is another diversified play. Soon to be spun off by AT&T (T ), many contend it will be a global powerhouse as it makes inroads into Europe and Latin America. And the stock of The McGraw-Hill Cos. (MGH ), BusinessWeek's parent, has been faring well. Under 13% of its revenues come from advertising.
Pure-play media companies could rebound next year if the economy picks up. "Advertising-based media stocks lead out of a recession, so you want to already be in these stocks as this happens," says Scott Mayo, co-portfolio manager at John Hancock Large-Cap Value and Small-Cap Value Funds. In fact, Clear Channel stock took off at the beginning of the year because investors had already priced in an improved ad environment six to nine months down the road, says Mayo.
Of course, there are naysayers. Tom Wolzein, media analyst at Sanford C. Bernstein & Co., says he doesn't see ad spending making a rapid comeback. "We may be having a disconnect between realities of the revenue side and earnings side and the performance of these stocks," he says. But even he concedes that diversified companies with less advertising exposure are worth entertaining in this environment.
By Marcia Vickers in New York