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are expected to have the highest returns on invested capital among the major media and entertainment stocks in 2011, analyst Laura Martin of Needham Insights said in a research report.

Martin measures the return on invested capital, or ROIC, among the companies in the entertainment and media industry to find the how efficient they are in using capital to generate profits.

"There is typically an 80% to 90% statistical correlation between U.S. entertainment company valuations and their year-forward returns on invested capital," she said in her Jan. 21 report.

She found that in 2010, ROIC momentum among media stocks was strong as the market saw a rebound in advertising spending. Cash from operations grew between 24% and 94% year-over-year for most entertainment and media companies while earnings before interest, taxes, depreciation, and amortization rose between 11% and 41%, with companies that rely heavily on advertising, like CBS and Viacom, at the high end of that range.

Martin looks at the companies' free cash flow, as share price performance often mirrors trends in free cash flow momentum. CBS's free cash flow was up 94% in 2010, Viacom's was up 57% and

News Corporation's


was up 37%. The weakest free cash flow was reported by

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Time Warner


, which saw a 6% drop in 2010.

She projects that in 2011, Viacom will use only 4% of capital spending to drive EBITDA growth, while



will use the most of the media stocks at 35%.

Companies can use free cash flow to repay debts or repurchase shares. Martin notes that CBS, Viacom and News Corp. all repaid significant levels of debt, while Time Warner added $1.3 billion of debt and used it to repurchase shares.

"Disney added both debt and shares outstanding in the latest 12 months and we expect this to continue for the next 12 to 24 months as it invests in cruise ships and the California Adventure theme park in Los Angeles," Martin said, "in addition to buying Internet assets that position the company strategically for the future."

Viacom shares are up 4.6% over the past year. Today the stock reached a 52-week high of $48.81 and closed at $48.31. CBS shares are up 7.6% over the past year and also hit a 52-week high today. The stock peaked at $20.85 and closed at $20.70.

"Based on an analysis of returns on capital, we recommend CBS and Viacom in the entertainment sector," Martin concluded in her report. "They are both companies that are generating enormous amounts of

free cash flow and are using it to shrink their asset bases through share repurchases and debt repayment."

She predicts that CBS' ROIC will grow to 6.2% in 2011 from 5.2% in 2010, despite lacking political advertising revenue. She forecasts that Viacom's ROIC will grow to 15.1% in 2011 from last year's 12.8%.

-- Written by Theresa McCabe in Boston.

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