6 Media Stocks With Big Upside


NEW YORK ( TheStreet) -- From a leading independent entertainment studio that just ended a truce with a billionaire activist investor who elicited thoughts of "Kim Jong Il's Brinkmanship" from Wunderlich analyst Matthew Harrigan ... to one of the world's largest media and entertainment conglomerates, which may be considering the sale of a famous business unit and using the proceeds to buy into video games ... to a company that this year held its first analyst conference in ten years ("Yes, ten years," Citi analyst Jason Bazinet wrote), the media and entertainment sector is a highly diverse one.

But that very diversity can also make it a minefield for investors who are looking to predict its coming hits.

In light of that, we offer a preview of some of the top names in the media sector ahead of their next earnings call.

Click here to see which media stocks are poised to to be blockbusters -- or bombs -- in advance of their next quarterly earnings report >>

NEWS CORP. ( NWSA)

Earnings Release: Aug. 4, after the market, unconfirmed

Consensus Estimate vs. Actual Year-Ago Earnings: 20 cents on revenue of $8.09 billion vs. net loss of 8 cents on revenue of $7.67 billion in the fourth quarter of last year.

Wedbush analyst James Dix's EPS estimate for News Corp's ( NWSA) June quarter is 20 cents, in line with consensus estimates. Dix predicts that cable opex (operational expenditure) will be up similarly to revenue -- over 10% -- due to the roughly $100 million impact of a skew of the launch of channels at Fox International Channels (FIC) more to the fourth quarter this year than last year, and greater programming expenses at FX Networks.

At the same time, Dix is expecting lower film entertainment revenue for News Corp., in light of the fact that many of the company's big releases, such as X-Men Wolverine and Night at the Museum 2, occurred last year. There were no major May releases this year and lower-than-expected box office hits from the June quarter's releases.

Also, more than 20% of New Corp's newspaper revenue is in the British local currency; Dix predicts that this segment experiences a negative foreign currency impact in the quarter. Moreover, in the television segment, Dix believes that year-over-year declines in ratings are continuing to "sap" the volume of advertising inventory that Fox has available to sell, causing network revenue to decline in the quarter.

Still, at the DBS TV segment, Dix assumes that ARPU (average revenue per user) will increase to over 44 euro from 43 euro as a result of temporary upgrades to World Cup packages. Furthermore, he estimates $27 million in earnings from equity affiliates in the June quarter. News Corp. has minority stakes in companies such as British Sky Broadcasting, Sky Deutschland and NDS.

In June, News Corp. offered to buy the 61% of British Sky Broadcasting that it doesn't already own for 700 pence a share. Credit Suisse's Spencer Wang sees "few strategic merits" to proposal. "In our view, vertical integration has few benefits in the media sector and the balance of power continues to shift to content owners, rather than distributors like BSkyB." Wang said he would have preferred to see News Corp. use its cash to return capital to shareholders.

CBS ( CBS)

Earnings Release: Aug. 3 after the market, confirmed

Consensus Estimate vs. Actual Year-Ago Earnings: 21 cents on revenue of $3.23 billion vs. 8 cents on revenue of $3.01 billion in the second quarter of last year.

What can positive commentary about NBC Universal from parent GE's ( GE) second-quarter earnings call tell investors about NBC? That they might also be able to look forward to some good news during CBS' ( CBS) second-quarter call.

NBC Universal's segment revenue rose 5% and operating profit increased 13% during the quarter. Cable network revenue increased 7%, and operating profit was up 10%. Meanwhile, broadcast revenue rose 1% and operating profit was up 6%. In addition, management noted strength at the local stations and the advertising markets; scatter market ad pricing was up more than 20% in the quarter.

However, NBC's networks experienced softer ratings in the summer.

If CBS' competitors are benefiting from an improving operating environment, then CBS, given its "superior ratings," should follow with similar results. "We view these data points out of NBC as good news ahead of CBS' second quarter," Jefferies' analyst Brian Shipmen declared in a recent equity research report. They're "good news for CBS where more than 60% of revenue is tied to network and broadcast TV."

THE WALT DISNEY COMPANY ( DIS)

Earnings Release: Aug 10. after the market, confirmed

Consensus Estimate vs. Actual Year-Ago Earnings: 59 cents on revenue of $9.38 billion vs. 52 cents on revenue of $8.596 billion in the third quarter of last year.

Credit Suisse analyst Spencer Wang has raised his EPS estimate for The Walt Disney Company's ( DIS) third quarter from 53 cents to 57 cents vs. 52 cents a year ago. "Our higher estimates reflect a continuation of Disney's renewed creative cycle and improving advertising trends."

In an investor note, Wang said the key drivers for third quarter should include the strong theatrical performance of Toy Story 3, and the Alice in Wonderland DVD; contribution from Marvel's Iron Man franchise; and improving advertising trends at ABC, ESPN and the company's TV stations.

Wang's thesis on Disney is based on pricing, rather than an attendance driven parks recovery, a strong studio content cycle, and a bullish view of the company's recent acquisition of character franchise company Marvel.

Meanwhile, numerous reports have hinted at a possible sale of the company's ABC division, which Jefferies' analyst Brian Shipman thinks would be positive for Disney, given that he doesn't view ABC as a strong strategic fit for the company.

Shipman values the ABC network, production studio and stations at about $10 billion, adding that given "the lack of obvious strategic buyers" -- as the FCC rules wouldn't allow a merger with competitors such as CBS, GE's NBC and News Corp's Fox -- private equity would "be the most likely outcome."

He predicts that proceeds from a sale would go toward video games, "the fastest growing segment in media" or even larger acquisitions of publicly-traded video game companies such as Electronic Arts. "Although these pure plays all have some franchises not ideal to the Disney brand, a larger acquisition could add scale, quickly."

VIACOM ( VIA.B)

Earnings Release: Aug. 5, before the market, confirmed

Consensus Estimate vs. Actual Year-Ago Earnings: 66 cents on revenue of $3.45 billion vs. 49 cents on revenue of $3.3 billion in the second quarter of last year.

On June 9, Viacom ( VIA.B) declared its first ever quarterly dividend; 15 cents a share of class A and class B common stock, which would be payable to stockholders on July 1. According to the calculations of Citi analyst Jason Bazinet, as reported his recent investor note, the dividend represents about 20% of Viacom's annual free cash flow and at the time of his calculations -- at current equity values then -- translated into a 1.8% dividend yield.

On that day, Viacom also announced the resumption of a stock purchase program it suspended in early 2009 due to unfavorable economic conditions. Under the program, the company increased the funds available to purchase Class B common stock to $4 billion. Viacom indicated that the purchases would occur from time to time beginning in the fourth quarter of calendar year 2010.

What does this dividend mean for Viacom stock? It means the shares prices could climb. Ahead of the company's next earnings call, Bazinet in his note writes that the stock is still trading at a significantly low multiple vs. peers, except News Corp. -- but that gap could begin to narrow. "We suspect Viacom was trading at a low multiple vs. peers because it wasn't paying a dividend," he wrote. "With the dividend and expected share repurchase activity, we expect the multiple to expand."

LIONS GATE ENTERTAINMENT ( LGF)

Earnings Release: Aug 10, after the market, unconfirmed

Consensus Estimate vs. Actual Year-Ago Earnings: 4 cents on revenue of $406.17 million vs. 23 cents on revenue of $387.7 million in the first quarter of last year.

One of the hottest topics surrounding Lions Gate Entertainment ( LGF) ahead of its first-quarter earnings call is, of course, the issue of billionaire activist investor Carl Icahn. He has been unsatisfied with company's performance and wants to replace at least the "lions share" of the current board. He looks to be getting closer to his goal.

In February, Icahnhad an 18.9% stake in the company. By early July, he managed to raise that stake to 37.9%, steadily gaining clout in the company despite an unsuccessful hostile takeover. Earlier, Icahn had put forth a $7 a share hostile offer, but on July 20, lowered it to $6.50. His new offer ends a ten-day truce that he and Lions Gate signed on July 9, as they tried to reach some form of agreement regarding potential mergers and acquisitions.

"This action signifies that the two sides could not come to a meeting of the minds on the future direction of the company, likely with regard to LGF's apparent desire to merge with MGM studios," Jefferies analyst Brian Shipman wrote in a recent equity research report. While Lions Gate is considering the merger in order to build its film library and continues to explore larger budget films, Icahn prefers that the company focus on TV production and low-budget, high-return urban and horror films, "which are squarely in Lionsgate's bailiwick," Shipman wrote.

But at his current stake, decisions requiring 2/3 shareholder vote may require Icahn cooperation, Shipman pointed out. That said, uncertainties about Lions Gate vs. Icahn is likely to distract management and create an overhang for the stock, even with improving fundamentals. Wunderlich analyst Matthew Harrigan for example worries about Icahn's "weak record in TMT (Telecom, Media, Technology) investments" such as recently delisted Blockbuster and Take-Two Interactive ( TTWO).

"We would be inclined to tender if we thought that he would win creeping control sans a premium," Harrigan wrote in his investor note. Meanwhile, after Icahn's original $7 hostile tender offer expired on June 30, Jefferies lowered its rating of Lions Gate to hold and the price target to $7 from $8. "We are downgrading shares of LGF as we believe support at $7 by Carl Icahn's tender offer which expired at 11:59 p.m. on 6/30 is now gone." Shipman believes there may be "limited uptake" at the $6.50 price.

TIME WARNER ( TWX)

Earnings Release: Aug. 4, before the market, confirmed

Consensus Estimate vs. Actual Year-Ago Earnings: 45 cents on revenue of $6.19 billion vs. 45 cents on revenue of $6.81 billion in the second quarter of last year.

Despite troubles at its news and sports segment, there's plenty to like about Time Warner Inc. ( TWX) beyond its second quarter. "We are increasingly optimistic about Time Warner Inc," Credit Suisse analyst Spencer Wang said in an investor note explaining an upward revision in 2010 EPS estimate that was largely based on higher Turner ad growth forecasts.

Wang thinks this growth will surpass that of the overall industry, helped by Turner's investments in Conan O'Brien and the NCAA, and has raised his 2010 EPS estimate from $2.23 to $2.24, up 22% year-over-year; and his 2011 EPS estimate from $2.56 to $2.63, up 18% year-over-year.

On May 27, Time Warner held its first analyst conference in ten years, providing insight into both the long-term risks and opportunities for the company. For Citi analyst Jason Bazinetut, as he had expressed in an investor note, the meeting indicated that Turner's prospects are "robust;" HBO "looks bright" -- with the likelihood of incremental revenue from DVD sales from new original series and continued margin expansion -- and that management has been effectively "capturing upside from digitization without succumbing to downside risks."

Bazinetutadded that Warner Brothers' theatrical results are likely to stay strong through 2011, though the unit's long-term dependence on DC Entertainment content could increase its risk profile, given that most of the valuable characters have already been "mined." Bazinetut's bigger worries, however, seem to lie in Time's news and sports segment.

What caught Bazinetut's attention was that it was already experiencing ad decline before the recession began; between 2007 and 2008, the segment's ad revenue fell by 5.3%, driven by an 8.5% reduction in ad pages, according to the analyst.

This problem area hasn't been enough to keep Bazinetut from saying that Time Warner Inc. has come a long way since its disappointing merger with AOL. After Time Warner's chief Richard Parsons retired, "a new face emerged: Jeff Bewkes," the analyst noted. "Mr. Bewkes is liked by the Street. But, in fairness, he doesn't enjoy cult status -- we suspect that has the potential to change."

After bringing Time Warner "back to its roots" with the recent spin off of Time Warner Cable ( TWC) and AOL ( AOL) and helping the company navigate "the choppy waters that a deep economic down turn brings ... now, it seems, is the time for Mr. Bewkes to shine," Bazinetut thinks. "As the economy begins to heal, Time Warner can get back to managing -- and growing -- its core businesses."
Small Cap Stocks to Watch: Lions Gate, Alpha Natural
Click here for small cap stocks to watch

-- Reported by Andrea Tse in New York

RELATED STORIES:

Get more stock ideas and investing advice on our sister site, Stockpickr.com.

Follow Andrea Tse on Twitter and become a fan on Facebook.
Copyright 2010 TheStreet.com Inc. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.