Report Card: Analyst Rankings

Jessica Reif Cohen Merrill Lynch
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2nd Place Broadcasting & Cable TV

Bio

B.S, M.B.A., New York University. Reif Cohen has been a securities analyst for 15 years. She joined Merrill Lynch in 1994 as a senior media and entertainment analyst. Prior to that she worked at Oppenheimer & Co., First Boston Corp., Credit Lyonnais and Arnhold & S. Bleichroeder.

Industry Outlook and Style

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[Note: Reif Cohen was not available for an interview. The outlook that follows was compiled from her Oct. 16 industry report on filmed entertainment, her Oct. 23 media/ broadcasting report and her Oct. 25 industry report on cable television. She gave her stock picks to TSC on Nov. 21.]

Cable: The Picture Looks Bright

Reif Cohen is extremely bullish on cable, which is rapidly evolving from a business offering simply video to one with an array of products, including data delivery, voice and, in the future, streaming media to multiple devices. "We believe these new services should make cable a more desirable and compelling service, thereby benefiting basic cable trends," she says. Reif Cohen says that the industry is unique in that it can offer these new services using its existing infrastructure and customer base.

In addition, since most of the top cable operators now widely offer digital cable, she expects interactive services like video on demand to be available soon. These low-cost, high-value additions will be very popular, she believes, thus giving cable a further advantage over the competition.

From a valuation standpoint, the Merrill Lynch analyst is also very positive. "In our view, cable as it stands now (without any additional interactive services) has enormous opportunity and compelling value with an incredibly attractive risk/reward profile." She says fundamentals are strong, the cost of capital is near historical lows, the regulatory environment is benign and competition is fragmented. She predicts that EBITDA growth will accelerate over the next several quarters. And, since cable is a relatively cheap form of entertainment, she describes these stocks as "a safe haven in an economic slowdown."

While on average the stocks are down 30% since the beginning of the year and are off 40% from their 52-week highs, she feels investor concerns about competition are overblown. Arguing that the upgraded cable platform is far superior to both direct broadcast satellite TV and telecom platforms, she asserts that geographically diverse cable companies have an advantage over these competing platforms: The big cable companies can afford to send in the marketing cavalry in a threatened area without much impact on the bottom line. By contrast, notes Cohen, the attempt by a smaller outfit to compete with the marketing muscle of a large cable company "can destroy an overbuilder's economics and has led to several well-capitalized companies exiting the business."

Her favorite cable stocks are Cablevision (CVC Quote), Comcast (CMCSK Quote) and Liberty Media (LMG Quote). (On Nov. 15 AT&T announced it would spin off Liberty Media, its television programming unit, as a separate corporate entity.)

Radio: Dialing Up Value

While advertising makes up generally less than 5% of cable operators' revenue, it is critical to both radio and television broadcasters. She believes that the radio industry's third- and fourth-quarter sales growth has been hurt by declining dot-com advertising, the Summer Olympics, which lured advertising dollars from radio to network television, and the Screen Actors Guild's six-month-long strike against the ad industry, which took a bite out of both radio and TV ad production. (Actors returned to work at the end of October, but talks between the guild and the Association of Talent Agents broke down in early November.)

Believing that even the decline in dot-com advertising is merely a temporary setback, the analyst predicts that revenue growth will return to the 8% to 9% range by mid-2001. In the meantime, Reif Cohen believes radio is cheap; investors may see good buying opportunities in the coming months, she asserts.

"Radio valuations have now corrected to such a point that value investors should begin to reexamine and reenter the sector," says the Merrill analyst. Favorite stocks here are Clear Channel(CCU Quote) and Infinity(INF Quote). (Merrill Lynch has had investment banking relationships with Cablevision and Clear Channel.)

TV Broadcasters: Mixed Signals

It goes without saying that television networks and their affiliates were also strongly affected by the Olympics in the third quarter. The games gave a boost to NBC, generating $65 million in net profits. (NBC is a unit of General Electric (GE Quote).) Other companies that benefited included those with a significant number of NBC affiliates in their stable of regional stations, including A.H. Belo (BLC Quote) and Hearst-Argyle TV (HTV Quote).

By contrast, advertisers for the most part avoided other networks for fear of competing with the Olympics. Another, less obvious way the games took a bite out of NBC's competitors: They pushed back the start of the fall season for all networks, which meant postponing the advertising surge that comes with it.

The upshot: Reif Cohen's group predicts that NBC should see network sales gains in the range of 70% over last year. By contrast, Fox and CBS will likely see low-single-digit gains. They expect ABC to fall somewhere in between, posting strong double-digit gains, thanks mostly to the network's wildly successful "Who Wants to Be a Millionaire?" game show. Fox Entertainment (FOX Quote) is the parent of Fox, while Viacom (VIA Quote) owns CBS, and Walt Disney (DIS Quote) is ABC's parent.

The analyst has two areas of concern for next year. A slowdown is one: "If the economy slows in 2001, the impact on TV station advertising may be punishing, " she warns. Coupled with a downturn in online dot-com advertising and the absence of Olympic and political advertising, negative sales growth would be likely, she says. Reif Cohen's other worry is the possibility of a Hollywood shutdown: Union contracts for writers, screen actors and television and radio artists are all due to expire by mid-2001.

Reif Cohen notes that, in television, "vertically integrated entities" that produce and distribute programming across several platforms (i.e., not just broadcast, but also cable and Internet) have performed best in 2000. Her group believes that they "will remain the best performing equities."

Her top picks in this group are Fox Entertainment and Viacom. Fox, which is 83%-owned by Rupert Murdoch's News Corp. (NWS Quote), fields a clutch of television networks: In addition to its main Fox franchise, these include FX Cable, Fox News and Fox Sports Net, among others. Meanwhile, media behemoth Viacom owns not only CBS, but also MTV, Nickelodeon and TNN, among other television properties.

Movies and Entertainment: Licensing and Litigation Are Key

Even though Reif Cohen describes box office results so far this year as "lackluster" compared to last year, the analyst explains that "box office grosses are only a small piece of the pie for overall studio profitability." Whereas theater box-office and video releases once generated nearly all of the film industry's revenues, increased distribution on broadcast and cable networks has become a boon for the studios. In fact, TV networks are projected to pay the studios license fees totaling $385 million -- a record -- for 21 of last summer's releases, according to the analyst.

In the music industry, litigation (Napster, MP3.com, the failed Time Warner Music/EMI joint venture) "has made the lawyers the industry's star performers," says Reif Cohen. While earnings have been solid so far this year, the industry is clearly concerned about the effect of online music and the accompanying copyright infringement implications.

MP3.com, she notes, has already settled with most of the major labels, paying settlements of $15 million - $20 million to each company and agreeing to pay a small fee each time a song is stored and accessed. And Napster recently announced an agreement with German media giant Bertelsmann (parent of BMG, one of the five biggest record companies) permitting Internet users freely to exchange music for a monthly fee. Reif Cohen believes there is "great potential" in this "peer-to-peer distribution of music."

Stock Pick

Favorite stocks for next 12 months:
Cablevision (among cable companies)
Fox Entertainment (among broadcasters)
Viacom (among entertainment companies)

Comments:

Cablevision "is the cheapest stock of the large cable operators, which we also think has the most near-term catalysts, including some recognition of Rainbow either spinning out its national cable networks in a tracking stock or selling outright."

Fox Entertainment "is the cheapest stock by far in the industry and has three locked-in growth drivers: cable networks, TV syndication and pending acquisition of Chris-Craft Industries (CCN Quote)."

Viacom "has the most momentum [among companies in the sector] and an enormous amount of synergies from the merger with CBS, i.e., cost-cutting and new business creation -- for example "Nick Jr. On CBS" on Saturday mornings."