Media Stocks' Lows Could Hold for a While

However, I believe it is fair to consider whether the stocks now reflect a worst-case scenario. Back when I wrote my previous column, I thought the stocks still had downside, because the average multiple on the low estimate was 12 times. Today, the average multiple on the low estimate has fallen to just over 9 times. While the current multiple of consensus is 7.5 times, stocks usually do not trade at their lowest multiples at the bottom of their cycle. Instead, multiples expand at the bottom as investors finally look forward to a resumption of earnings growth.

If that is going to occur for media stocks, investors must assume that 2010 will be the first year of recovery. Right now, there is no visibility on 2010 advertising, but comparisons are going to be very easy, given that 2009 advertising forecasts are now assuming at least a 10% decline in all categories.

I suspect it is going to be a while before confidence returns to media stocks and the stocks begin to move up. But I do believe that lows made in late November will hold for a while. That may not be saying much, as recent lows are 20% to 30% below current prices, but I do believe you should be looking again at the major media stocks if the retreat toward new lows and 2009 consensus estimates begins to converge with low estimates.

When it does come time to own the group, the best ideas are Disney and Time Warner. Both stocks have seen their estimates hold fairly well, indicating that there is underlying strength in their business models.

My top pick is Time Warner, because I feel it has less estimate risk, and the first-quarter 2009 split from Time Warner Cable (TWC - commentary - Cramer's Take) will leave the company with a strong balance sheet that can be a catalyst for increasing shareholder value. For a full analysis of Time Warner, please see the column I posted on Friday, "It's Time for Time Warner."

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Know What You Own: Other stocks in the media sector include News Corp. (NWS - commentary - Cramer's Take), Viacom (VIA - commentary - Cramer's Take), Rogers Communications (RCI - commentary - Cramer's Take) and Central European Media Enterprises (CETV - commentary - Cramer's Take).

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At time of publication, Birenberg was long Time Warner in personal and client accounts, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.