- Georg Szalai

Wall Street has become more optimistic about the advertising outlook for media companies ahead of the hot phase of third-quarter earnings season, and stocks have continued to run up as a result.

If quarterly results and CEO comments on conference calls confirm a strengthening of ad demand, analysts could further lift financial projections for key sector firms.

But they warn that only select industry stocks may have more left in the tank at this stage, arguing that many are already trading at prices that include assumptions for most of the ad upside opportunity.

"Since early September, ad-sensitive media stocks have rallied reflecting the positive momentum in national and local TV advertising," Sanford Bernstein analyst Michael Nathanson said in a report Monday, touting Disney and Viacom as having the biggest upside. "While the momentum is real and could drive earnings per share revisions, we think the market is already pricing in the bulk of the upside."

UBS analyst Michael Morris also pointed to some signs that ad trends have stabilized. "In particular, we have heard a more positive tone on television trends as companies begin lapping easier fourth-quarter comparisons," he said. Plus: "Major ad buyers, including McDonald's, Coca-Cola and Merck, indicated in the past week that ad spending is likely to grow."

Morris predicted "relative outperformance" for shares of Viacom and CBS, the most ad-exposed media giant, over the next 12 months.

For entertainment and media industry biggies, national TV scatter ad prices have been especially strong, coming in above upfront sales levels by high-single to low-double digit percentages, thanks in part to marketers looking to boost holiday season business, according to Nathanson.

Nathanson raised his price targets and earnings forecasts for key sector stocks Monday but continues to rate only Disney and Viacom at "outperform" and others at "market perform."

"Ratings share gainers have the best chance of exceeding rising expectations," such as Disney, he argued. Scripps Networks Interactive is also gaining ratings momentum, but the stock is already priced expensively, while News Corp.'s upside potential at the Fox network may be offset partly by weaker-than-expected trends at some cable networks, he argued. Viacom, meanwhile, is still looking to further boost ratings, but the stock is cheap enough to give it upside.

"We continue to see the most upside in Disney [18 percent] and Viacom [9 percent]," Nathanson concluded.


Nielsen Business Media