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February 08, 2006

Positive Sentiment Change For Media Stocks?

Breakup Time Warner! Univision for sale! Knight Ridder up for auction! Viacom splits in two! Clear Channel spins off its billboards and concert business! Cablevision is paying a special dividend – maybe not! Disney sells radio! Disney buys Pixar! Liberty Media splits off QVC! DirecTV is buying back $3 billion of its shares, Comcast is buying $5 billion, Disney is buying another $5 billion, Time Warner is buying $5 billion, Viacom is buying its shares, CBS is paying a decent dividend.

What the heck is going on? Obviously, big traditional media is under pressure and in some cases responding with asset sales, share buybacks, or dramatic corporate restructurings. I've been following media stocks for 20 years and one thing that has always been bullish has been merger and acquisition activity. Until recently, all the media M&A has been in Europe. Not coincidentally, European media stocks have performed much better than their U.S. peers.

So the question becomes will the flurry of M&A in the U.S. finally capture the attention of investors and lead to a rally in the shares or will overwhelming concern about future growth rates and the sustainability of free cash generation keep valuations depressed?

I mention this today because Wednesday was the first time in a long while that pretty much every media stock on my monitor, almost 50 of them, was up on the day. The stocks were up all day, even in the morning when breadth stunk and the major averages were barely up or underwater.

Yesterday morning marked the simultaneous reporting of the Icahn breakup plan for Time Warner and the potential sale of Univision. Did this represent the bottom? Will the shares see better performance in the months ahead?

I think the answer might be yes. Recent days also saw a great response to a good quarter by Disney and a nice bump for DirecTV after a decent quarter. Disney offers solid double digit growth. DirecTV is transitioning to a controllable growth strategy, trading subscriber growth for sustainability. Is the market's response to the quarters of these two companies a sign that a change in sentiment is at hand? I think so but the names that will lead are those that combine M&A potential, free cash flow dedicated to shrinking the capital base, and most importantly a growth profile over the next few years. DIS is the best of the big caps, while Central European Media Enterprises (CETV) is the best of the small and mid caps.

Posted by Steve Birenberg at February 8, 2006 04:22 PM in Media