Earnings could mark end to rally in U.S. media stocks

Fri Apr 29, 2016 11:21am EDT
 
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(This April 26 story corrects spelling of 'Burnstein' to 'Burnstine' in eighth paragraph)

By David Randall

NEW YORK (Reuters) - U.S. fund managers' newfound love of media stocks will soon be put to the test.

Shares of Time Warner Inc, Twenty-First Century Fox, and CBS Corp are all up by double digits since the start of the year. That rally came in large part because fund managers jumped in after media stocks tumbled on concerns that customers were increasingly opting for web-based television platforms over cable subscriptions, the type of so-called cord-cutting which has weighed on Walt Disney Co's expensive ESPN sports division.

Now, with media stocks in the S&P 500 trading at a trailing price to earnings ratio of 19.4, their highest valuation in four months, investors will need confirmation that the momentum can continue.

"This earnings season will be an important test for valuations for these stocks," said Steven Cahill, an analyst at RBC Capital Markets. "If it's a quarter where forward numbers have to come down, then all the fears of cord-cutting will be reinforced and these stocks will be stuck in a lower valuation range."

CBS, Twenty-First Century Fox and Time Warner - which are all expected to release their earnings results next week - are the most susceptible to steep drops should their results miss estimates because their forward earnings-per-share estimates have risen since the start of the year, Cahill said.

The number of funds adding shares of Twenty-First Century Fox has jumped 23.5 percent this quarter compared with the quarter before, according to Morningstar data. As a result, its trailing price to earnings ratio has jumped to 25.7, its highest level in more than five years, while its share price is up 14.1 percent.

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Traders work on the floor of the New York Stock Exchange (NYSE) April 15, 2016. REUTERS/Brendan McDermid