I went to see John Janedis, Media and Entertainment analyst at UBS yesterday.John's coverage group includes names like Disney; Time Warner; and Viacom. He also follows other media areas such as advertising (e.g. Omnicom) and newspapers (e.g. Gannett).
John's entertainment stocks have had a good run this year. Discovery Communications has lead the pack, jumping +51% YTD, but others like Disney (+29%) and News Corp. (+38%) have been good to investors as well.
Despite their recent outperformance, the valuation of the group remains interesting. Most of the are trading at a discount on 2013 earnings estimates to the S&P multiple despite having growth rates in the high single digits.
Investors, its seems, are worried that companies will be slowing their advertising spending in traditional media outlets.
John does not disagree that his group faces challenges next year. He discussed at some length the poor ratings trends that some of the big media companies are experiencing.
John noted that Viacom and News Corp in particular have seen large declines in ratings over the past years. Low ratings force media companies to offer advertisers "make good" advertising slots, which of course hurts financial results.
One of the most interesting comments I heard from John yesterday, however, was the fact that his stocks are getting a considerable amount of attention from investors in consumer staples stocks.
"If you see a stock like Coca-Cola trading at 19 times earnings with very little top line {i.e., revenue} growth, and compare it to a company like Time Warner, which is trading at less than 11 times earnings and revenue growth of +8%, it is not hard to see why investors are interested, " said John.
"In addition, many of my stocks offer decent dividend yields, which furthers their appeal to conservative investors."
Time Warner is John's favorite stock in his coverage universe, but he also has a buy on CBS Corporations.
Are media stocks the new consumer staples stocks?
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