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: 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. But what you do see in this business is a definite flight to quality. Companies like Viacom and AOL Time Warner (NYSE:AOL) continue to outperform their peers because they offer such compelling content and programming that will draw advertisers to them first when they return to the market. This is evident at Viacom (NYSE:VIA), for example, where CBS audience figures this season to date are up 16% from last year and this improvement is helping the company sell inventory at rates higher than in the upfront market.

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, again, would be the defensive play in the entertainment universe. The more leveraged or cyclical companies would be Viacom or Walt Disney (NYSE:DIS), in particular. Viacom, of course, has, in our opinion, an extremely high quality asset mix, strong management, and also excellent long-term growth prospects. With two-thirds of Viacom’s business tied to advertising, the company should disproportionately benefit in the event of a recovery. For example, 80% of radio revenues are converted to free cash flow, so when the turn comes it will be fast and furious.

TWST: To what extent is the falloff in attendance for the theme parks related to the economy, and to what extent do you think it’s related to people’s fears of being vulnerable to a terrorist attack?

Ms. Krutick: I would say that most of the falloff relates to the fear of the travel market. In fact, before September 11, the economy was weak and by our estimates attendance was tracking flat to down modestly. For a 25% falloff in attendance, I would say 20% is tied to the fear factor, and 5% is a function of the slow economy.

TWST: Should an investor buy Viacom and/or Walt Disney today?

Ms. Krutick: We think that these are very attractive companies. We recently raised our price target on Viacom to $50 per share, and for Walt Disney we carry a $25 price target. Today Viacom is trading at about 16 times enterprise value to EBITDA on our 2002 estimates, setting the high water mark for the big cap, diversified media companies. It’s no secret that Viacom is very levered to the economy and an interesting way to play a turnaround. While this fact hasn’t been lost on investors, we do see more upside potential as investor confidence in a turnaround builds and we view our $50 target as still conservative. The peer group is trading at an average of 14.5 times EV/EBITDA.

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.