both their employers and the competition because of their expert knowledge.
But despite the fact his clients know the players and developments in media-related companies, some might tend to own a lot of their employer’s stock. He advises they should be more diversified. Morgan Stanley suggests they place no more than 13% of their assets in consumer durables, the sector entertainment-related stocks fall in.
FREE CASH FLOW: KEY TO GROWTH
Some institutional investors who want the biggest bang for their buck recommend buying media-related companies backed by growth in EBITDA, or earnings before interest, taxes, depreciation and amortization. Walt Pearson, who manages $2 billion in institutional money for Alliance Capital Management in New York City, explains that entertainment companies with the potential capacity for double-digit EBITDA growth, or cash flow, have good prospects. Why? With free cash flow on hand, they should have ample capital to invest in their core businesses and expand into new ventures.
Companies Pearson estimates will achieve double-digit EBITDA growth include Time Warner, AMFM Inc. (NYSE: AFM) and Liberty Group (NYSE: LMGA), headed by John Malone, “one of the shrewdest managers in America,” Pearson says. (AT&T recently acquired Liberty Group when it bought the company’s parent, Tele-Communications Inc., better known in the cable industry as TCI.)
But he’s shying away from Disney. “We don’t like Disney. Its growth rate is coming down, there’s multiple contraction. There’re just a lot of question marks in its businesses.”
me of those uncertainties stem from the fact that Disney chief Michael Eisner “doesn’t have a No. 2 man we’re comfortable with,” Pearson says. While Disney’s theme park business is doing well, its movie division’s results have been spotty, he adds.
Another sore spot: Disney’s acquisition of ABC has been a major contributor to its reversal of fortune. “So far, it’s been a bad acquisition for them,” Pearson says. One of the stated reasons for the merger, marrying Disney’s content with the network, hasn’t paid off for the company. “The execution has been really off. They’ve bitten off more than they can chew.”
PRODUCTION COSTS SKYROCKET
The rising cost of producing movies and television programs is another major concern for industry analysts, since it puts pressure on the profits of even the most diversified media conglomerate. “One thing such companies are trying to contend with is higher costs, both on the programming side and on the theatrical side. These costs are escalating,” says Linda Bannister, media analyst with Edward Jones, an investment bank in St. Louis. She cites the spiraling salaries of stars and fat pay packages to retain such shows as NBC’s ER on the network as key examples.
Bannister also maintains the “domestic market is saturated,” with all kinds of entertainment choices vying for consumers’ increasingly limited free time. “Now you have the Internet. There are so many different channels, and so many different ways for people to spend their leisure time,” she adds.
On the positive side, Bannister sees opportunities for media companies smart enough to expand overseas. In particular, she thinks entertainment companies have barely scratched the