By Georg Szalai
NEW YORK (Hollywood Reporter) - It was a good first quarter for U.S. stocks but an even better start to 2010 for most big media and entertainment stocks.
Shares of sector conglomerates are up across the board for the first three months of 2010, except for a minimal decline at CBS Corp., and most outperformed the broad-based S&P 500 stock index. Most sector biggies have set new 52-week highs since mid-March, many in recent days.
The picture is in stark contrast to March 2009, which marked a market low, including 52-week lows hit by entertainment giants. Since then, the one-year returns for conglomerate stocks range from 79% for Time Warner to 269% for CBS Corp.
Improving economic and advertising trends and continued profit improvements, driven by cost reductions in the recession, provided investor optimism. But some on Wall Street caution that big sector stocks will have a tougher time continuing their upward momentum from here amid sector stocks' run-up and expectations that the U.S. economy will only improve slowly.
While media biggies extended their run-up in the opening quarter of 2010 with gains ranging from the 6.8% for News Corp. to 32.1% for Sony Corp. (excluding CBS' 0.8% decline), the S&P 500 edged up only 4.9%.
At the end of the quarter, Disney remained the Hollywood powerhouse with the biggest market capitalization at $67.7 billion, followed by News Corp. ($39.8 billion), Sony ($38.5 billion) and TW ($36 billion). Viacom stood at $21 billion after Wednesday's close, and CBS at $9.4 billion. All remain well behind technology powerhouses Apple ($213.1 billion) and Google ($180.3 billion).
Some media and entertainment analysts predict a rocky road ahead for big media stocks. Barclays Capital analyst Anthony DiClemente, for example, late last week raised his 2010 U.S. ad growth forecast from 3.5% to 5.5% amid stronger-than-expected automotive and political TV ad trends. But he also cautioned: "While we maintain a bullish view on ad trends themselves, we do believe that investor expectations for advertising growth are more adequately reflected in stock prices at this juncture, as media now trades at a premium to the stock market on basic valuation multiples."
But others, Miller Tabak analyst David Joyce, remain positive on the sector. "We still see constructive ad growth throughout the year," he told The Hollywood Reporter. "However, the bigger story may still be margin outperformance from the drastic cost cuts last year that are currently bearing fruit."
Overall, he is "still cautiously optimistic, with 'buys' on many of the names in our sector," he said. "Investor sentiment seems to still be embracing the media sector."
Except for Sony -- whose stock price often is also driven by its consumer electronics business -- Viacom was the best performer in the first quarter, hitting a 52-week high of $34.78 Wednesday. It has received a lot of analyst support as of late. DiClemente called it his second-favorite sector pick behind Scripps Networks with an "overweight" rating. Joyce raised his price target by $3 to $39.
Wunderlich Securities analyst Matthew Harrigan told THR that Viacom is his favorite conglomerate stock "by a good measure." And Sanford C. Bernstein's Michael Nathanson has an "outperform" rating and $39 target on the stock and recently shared with investors "11 reasons why you should buy Viacom now," none of which mentioned the hit MTV show "Jersey Shore."
"Viacom is attractive for a variety of factors," he wrote. "For starters, it is the cheapest in the sector on price/earnings and below its long-term average relative multiples."
Disney ended the first quarter near its recent 52-week high of $35.60. While 3D film juggernaut "Alice in Wonderland" will start making its real bottom-line contribution in the second-quarter 2010, analysts took its performance as an encouraging sign. "The film's spectacular success suggests that the yearlong studio turnaround efforts are beginning to take root," said Tony Wible, analyst at Janney Montgomery Scott.
Time Warner shares reached a 52-week high of $31.75 on Tuesday -- exactly a year after hitting a year-low. Management has touted the growth outlook for the content-focused company after its sale of AOL and split-off of TW Cable. But some on Wall Street have voiced doubts that the company can grow strongly enough. DiClemente recently ranked TW at the bottom of his list of desirable sector stocks in the seventh spot.
Shares of CBS Corp., meanwhile, have seen the highest return out of all media biggies during the past year and led gainers with a 77% increase in 2009. But they are down about a dollar from their 52-week high of $14.95. Some analysts have argued that there might be more near-term upside driven by upfront ad excitement that could benefit the most ad-exposed sector major. But others warn that the stock has run up so much during the past year that it will be range-bound.