For Subscribers

Get the complete article now!

Two analysts and top management from seven sector firms examine the leisure & entertainment sector in this special 46-page Leisure & Entertainment issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info466.htm.

TWST: How would you assess the impact of the events of September 11 on the sectors that you follow? Did they compound the recession-caused problems that the companies were already experiencing, or present a new set of challenges?

Ms. Krutick: Both. There is no question that for the advertising-sensitive companies there was a light at the end of the tunnel before September 11, and that light has been shut off. There is really no visibility in the ad market. In fact, some near-term data points suggest that we may not be at the precise bottom yet in terms of the advertising market, while other data points are somewhat encouraging. For example, total magazine ad spending fell 9.6% and ad pages fell 16.8% in October, but first quarter 2002 cancellations appear to be quite low. There has been a major corporate retrenchment on the advertising side, so that recovery will likely to be more protracted. Meanwhile, the content-driven businesses have shone, lending some stability to the entertainment companies. The theme park sector, along with the travel industry as a whole, has been severely affected. Attendance trends at Disney World are tracking 20%-25% lower than last year. Similarly, other destination leisure companies in the cruise industry were decimated short term, but have rebounded recently. Given the differing seasonality of the leisure businesses, the timing of recent events hurt some companies less than others. For example, cruise companies and regional theme park operators are in a less critical part of their season. The real key for the cruise business will be the level of demand during the wave period.

TWST: Going back to the entertainment companies, how can the broadcasters recoup the losses they incurred from the days of advertising-free broadcasting following the attack on the Twin Towers, particularly given your comments about the protracted recovery in advertising?

Ms. Krutick: The lost revenue from pre-empting advertising and incurring extra news coverage costs cannot be recouped. What the broadcasters need to increase cash flow generation is a bounce back in advertiser demand. Higher demand would enable price and profit increases. In our opinion, advertising is going through a difficult cyclical period, not a secular one. Obviously we’ve seen a period of substantial outperformance from an advertising standpoint over the past few years. In 2000, total broadcast TV advertising grew 11.4%, higher than the 10-year average growth of 5.6%. Now we are seeing a major retrenchment with no evidence of an improvement on the horizon. It could be two to three years before we build back to double-digit growth in advertising.

TWST: Let’s go back to your other top picks on the entertainment side. You like AOL Time Warner. What else do you like?

Ms. Krutick: AOL Time Warner (NYSE:AOL), again, would be the defensive play in the entertainment universe. Walt Disney (NYSE:DIS) is a company that is obviously highly dependent on the consumer, with about 35% of its operating income tied to advertising and another 40% tied to the theme park business. Disney has been focused on reducing costs for the last one and a half years, and this streamlining should enhance share price appreciation in a better market. If Disney’s theme park business turns, for example, the incremental margin on revenue growth will be much more significant.

1) Leisure & Entertainment Stocks - In an in-depth (4,200 words) Analyst Interview, Jill S. Krutick, Managing Director at Salomon Smith Barney, examines the outlook for the sector and shares specific stock recommendations.

2) Interactive Entertainment - In an in-depth (4,000 words) Analyst Interview, Miguel Iribarren, Research Analyst at Wedbush Morgan Securities, examines the outlook for the sector and shares specific stock recommendations.

3) CEO interviews (average 2,500 words). Top management of seven sector firms examine the outlook for their firm and the sector.