Big Media See Reversal of Fortune

NEW YORK Wall Street continues to turn sour on media and entertainment stocks heading into 2008, even though several sector big players already are seeing their stocks near their 52-week lows.

After gains in first-half 2007 for some key players, the second half has brought a reversal for many, with Sony and Viacom the big exceptions among the conglomerates.

Bear Stearns’ Spencer Wang on Monday became the latest analyst to turn bearish on the sector as he cut his rating on the overall industry from “market weight” to “market underweight,” citing slowing DVD sales and slipping TV usage of younger demographics.

The DVD malaise along with lowered advertising market expectations have been key factors that have driven media and entertainment stocks lower in recent weeks.

“The biggest problem is slowly eroding expectations” across the industry, said Lawrence Haverty, portfolio manager at Gamco Investors, pointing to the ad and DVD concerns, as well as a reduced likelihood of big buyouts amid the global credit crunch.

Shares of Time Warner, News Corp., Disney and CBS Corp. have all declined during the second half and are close to their year lows.

Smaller firms with a pure-play entertainment focus also have suffered.

For example, Lionsgate shares closed at $11.03 on June 29, but finished at $9.55 on Monday—down 13.4 percent since the midyear point and off the $10.73 price as of the end of 2006.

Similarly, DreamWorks Animation’s stock finished the first half at $28.84, down slightly from its 2006 closing price of $29.49. But since the midyear point, it has declined 12.3 percent to $25.29.

Not all stocks have been depressed though. Sony’s American depository shares are up 6.7 percent to date in the second half. The stock has benefited from a continued turnaround in the conglomerate’s electronics business, a strong box office and a recent investment from Dubai. And Viacom shares have bounced higher amid Wall Street confidence that the company’s cable networks are gaining ratings momentum.

Goldman Sachs analyst Anthony Noto was one of the first on Wall Street to downgrade the entertainment sector in the fall. He established a “cautious” rating on the industry in September. He followed that up with a report last month that said there have been numerous company and macro-economic data points since then that have only strengthened his conviction that this was the right call.

A decline in DVD sales momentum is one negative trend that observers have pointed out as of late, and things could get worse from here.

“The DVD market is rolling over and is down 3.5 percent year-over-year through the third quarter,” Wang noted in Monday’s report. “With little traction on HD so far, pricing pressure and less penetration opportunity left, we believe that the decline in the DVD market will accelerate in 2008 and beyond.”

Pali Research analyst Richard Greenfield echoed Wang’s bearishness on the DVD market in the U.S. In a blog post Monday, he said that his prediction that 2007 would be the first year of decreased consumer spending on DVDs “appears to be coming true.”