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Good Quarter for Media Winding Up as Earnings Loom

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Media stocks fully participated in the big stock market rally to start the year. Earnings are the next hurdle.

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With just a few days left, the first quarter is proving quite profitable for media investors.

Depending on the index, the stock market is up anywhere from 12% to 20%, with technology leading the way thanks to a 51% gain for Apple (AAPL).

Other technology stocks playing off the broadband Internet theme are also leaders. Qualcomm (QCOM), which provides chips for most leading smartphones, is up 2%. EMC (EMC), which provides storage solutions for data intensive Internet applications, is up 38%.

Notably absent from the gains is Google (GOOG), which is just turning positive for the year after dropping close to 20% in the aftermath of its disappointing fourth-quarter earnings report back in January.

Media stocks have also been leaders as investors have responded to improved sentiment toward the US economy while brushing off weaker-than-expected fourth quarter advertising growth. CBS (CBS) is up 20% this year. Discovery Communications (DISCA) is up 23%. Disney (DIS) and AMC Networks (AMCX) are up 18%. Comcast (CMCSA) is up 27%, while Time Warner Cable (TWC) has risen 29%. Leading the way among all media stocks is Lions Gate (LGF), up 75% on the back of the huge opening for The Hunger Games (two thumbs up from the Dow of Steve, who also loved the book).

One thing each of these companies has in common is news flow, and business fundamentals have been leading the industry in one form or another. The TV networks all have excellent ratings and mostly produced the highest advertising growth in the fourth quarter. The cable companies are responding to reduced worries about cord cutting, stable to improving top line growth, and rising free cash flow to drive share repurchases and dividend increases.

Juxtapose this against the laggards. Viacom (VIA) with poor ratings is up less than 5%. Time Warner (TWX), also struggling with ratings at its leading networks, is up less than 4%. Cablevision (CVC), facing management turnover, accelerating capital spending, and declining subscribers and operating cash flow is up just 6%.

In a bull market, investors gravitate to leaders – stocks and business models that are working to attract investor dollars. Of course, Wall Street is fickle, and in about three weeks a new set of quarterly earnings is sure to upset the status quo.

Advertising Age offered a glimpse of what is to come with an overview of first-quarter ad trends. The message is good for TV and Internet, especially social media, and poor for print. Local seems to be making a comeback.

According to Advertising Age, Magna Global projects TV and outdoor up about 5% in the first quarter, with print down a similar amount and radio flat. TV is expected to accelerate later this year thanks to political ads and the Olympics. The Internet is expected to produce double-digit growth this year with social media leading the way.

Advertising Age notes that, unlike in early 2011, there is no rising tide lifting all boats. Winners in ratings and eyeballs and time spent using are gaining share and growing at or above industry trends. In many recent columns, I have noted this represents the maturity of ad cycle.

Coming off the devastating cyclical downturn of 2008 and 2009, advertisers returned quickly as the economy bottomed and began to strengthen. Growth was high partially due to easy comparisons. This environment benefited most companies, especially those in national TV.

Two years into the recovery, the cycle is more normal. Underlying growth is still decent but more in line with GDP growth. Winners gain market share and outgrow overall advertising. Losers face growth rates below their peers.

This reality should play out clearly in first-quarter earnings reports. The stock market, always forward looking and discounting future trends, has almost assuredly showed us the winners. If those companies come through as expected and provide guidance for continued above-average growth, their stocks can continue to lead and move higher despite the big gains. I will be looking for change at the margin, winners losing momentum, and losers turning the corner to better times.

This column was previously published by SNL Kagan on www.snl.com.
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No positions in stocks mentioned.
Entermedia is a long/short equity hedge fund focused on media, communic= ations, and related technologies. Steve Birenberg is co-portfolio manager o= f Entermedia, owns a stake in the Funds' investment management compan= y, and has personal monies invested in the Funds. CBS and Discovery Communi= cations are widely held by Northlake Capital Management, LLC, including in = Steve Birenberg's personal accounts. Steve is sole proprietor of Nort= hlake, a long only registered investment advisor.

The information on this website solely reflects the analysis of or opin= ion about the performance of securities and financial markets by the writer= s whose articles appear on the site. The views expressed by the writers are= not necessarily the views of Minyanville Media, Inc. or members of its man= agement. Nothing contained on the website is intended to constitute a recom= mendation or advice addressed to an individual investor or category of inve= stors to purchase, sell or hold any security, or to take any action with re= spect to the prospective movement of the securities markets or to solicit t= he purchase or sale of any security. Any investment decisions must be made = by the reader either individually or in consultation with his or her invest= ment professional. Minyanville writers and staff may trade or hold position= s in securities that are discussed in articles appearing on the website. Wr= iters of articles are required to disclose whether they have a position in = any stock or fund discussed in an article, but are not permitted to disclos= e the size or direction of the position. Nothing on this website is intende= d to solicit business of any kind for a writer's business or fund. Miny= anville management and staff as well as contributing writers will not respo= nd to emails or other communications requesting investment advice.

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