Time to Change the Channel on Media Stocks
Big media stocks have been riding high this year as companies have been able to find ways to get paid for content despite a weak economy. But with the sector sporting a nearly 30 percent gain in 2013, it may be time to change the channel on some.
"What makes great dominant media companies good investments and good businesses is their ability to implement price increases given their competitive advantages," said Jaison Blair, an analyst at Telsey Advisory Group. "Our view has been in a slow-growth environment these companies can still implement price increases."
That should spell good news at the upcoming upfronts, when TV broadcasters typically sell 60 percent to 70 percent of their ad inventory for the approaching season.
The media heads are upbeat. CBS CEO Leslie Moonves said he expects ad prices' rise to be in the high single or low double digits, recently telling CNBC that "we should lead the marketplace."
Disney's Bob Iger, meanwhile, said in a CNBC interview, "We feel good about the prospects for the upfront and good about our programs. I would say we are reasonably bullish about prospects for advertising for the rest of the year."
Blair said that there's some posturing in Moonves' estimates for the upfronts but that there's a "strong enough consumer spending recovery to generate mid-single digits or better" increases.
"The whole TV network group is a great group right now," said Lazard Capital Markets analyst Barton Crockett. "You've got a lot of secular strength. These guys are able to get paid a lot more for their content. There's a lot of pricing leverage over television advertising."
But after stronger-than-expected quarterly earnings and stock outperformance, the shares may already reflect much of that good news.
"Disney and the entertainment group have gotten hot from an investment perspective, and the prudent approach is to be just a bit more cautious here," Telsey's Blair said.
According to data from Thomson Reuters, Wall Street's median price targets on media stocks suggest limited upside from here: less than 10 percent for Disney, Time Warner and News Corp. and about 10 percent for CBS.
Disney bulls are still out there, however.
"The operating part of the business is just firing on all cylinders," said fund manager Larry Haverty of Gabelli Funds. "People are going to the parks, seeing the movies—the stock's way undervalued."
(Read More: Disney Stock Still Has Some Magic Left: Pro)
UBS analyst John Janedis recently upgraded Disney to "buy" from "neutral," with a $72 price target. Though Disney missed most of this year's improvement, he wrote in a research note that he expects the company "to generate above average revenue and EBITDA growth rates over the next three fiscal years."
But Tony Wible at Janney Montgomery Scott is more cautious, telling CNBC, "From here, all the positive things people know about."
The Secret About Viacom
Wible said he'd rather look at Viacom, which trades at 12.5 times earnings, than at Disney trading at 16 times.
"One of the secret things on Viacom is the relationship to 'Iron Man 3' and 'The Avengers,' " he said. "Few people realize that when they sold the distribution rights to Disney, they actually will get a cut of those receipts that not only land from theatrical but DVD and the TV window."
Wible also points to Viacom's low overhead and strong ratings recovery after a rough patch last year as reasons to be bullish.
Tuna Amobi, media analyst at S&P Capital IQ, still likes News Corp. He attributes much of this year's gains to the upcoming separation of the company's publishing and entertainment businesses.
"Beyond that, the fundamentals of the company continue to seem strong," Amobi told CNBC, adding that share buybacks could be a further catalyst for the stock.