Entertainment stocks rise on improved ad outlook

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PHILADELPHIA -Shares of entertainment stocks rose Thursday after analysts raised their earnings and revenue forecasts, as well as price targets, for companies in the sector as advertising spending improves.

UBS analyst Michael Morris upgraded the sector on the belief that advertising revenue will improve to pre-recession levels. He doesn't think that the recent ad slump represents a permanent change in the way companies market to consumers.

Rather, he believes that the drop in ad revenue will return to pre-recession levels, based on an examination of ad trends in the past few decades. Morris saw a consistent ratio of ad spending and consumer discretionary spending over time: For every $1 of consumer spending, companies spend 2.3 cents on advertising in the last 30 years.

The ad forecast for 2009 shows a decline far from the historical trend and a return to historical levels implies that the ad outlook should be increased by $24 billion.

Among entertainment stocks, he prefers CBS Corp., Walt Disney Co., Time Warner Inc. and Viacom Inc. He has "Buy" recommendations on all four. He raised his price targets and earnings estimates for 2009 and 2010 for CBS, Disney and Time Warner.

Deutsche Bank analyst Doug Mitchelson raised his earnings estimates for the sector after national advertising revenue came in higher than expected in the third quarter. He also noted that there were few missteps in film, except for Disney's slate.

Mitchelson raised his revenue forecast by $166 million to $32.1 billion for the group and earnings before interest, taxes, depreciation and amortization by $151 million to $4.72 billion. He sees ad spending continuing to strengthen in the fourth and first quarters.

He likes CBS, News Corp., Time Warner and Viacom, raising their third-quarter adjusted profit forecasts. Mitchelson also upped the price targets of CBS, Viacom and Time Warner Inc.

Shares of CBS were up 46 cents, or 3.8 percent, to $12.57 in afternoon trading. Disney rose by 51 cents, or 1.8 percent, to $28.68, News Corp. was up 42 cents, or 3.1 percent, to $14.10 and Time Warner added 46 cents to $30.51. But Viacom fell by 4 cents to $30.24.

2009-10-08 16:06:09