As a follow-up to "Future Financial Winners and Losers" and "Retailers and Restaurants: Future Winners and Losers," let's take a step back and look at some of the characteristics of companies that might survive the current financial crisis and those that might wither away in the future.
I will use the media and entertainment sector as the backdrop for my analysis.
So, what are a few big forces that help determine future winners and losers? Here are three.
1. Societal Changes
Guns replaced swords; cars replaced the horse and carriage; The Fedora gave way to the baseball cap. Sometimes tastes changes and sometime new technology triumphs. Right now in media, print is dying and cable television and Internet news is growing. Witness the bankruptcy of the Tribune, the Philadelphia Newspapers group and Journal Register. Now
The New York Times
are under pressure from dwindling readership, lost advertising and heavy debt loads.
It appears that the strongest company in this particular industry is
The Washington Post Co.
. The Washington Post is still generating healthy profits and has virtually zero net debt, after subtracting out the company's cash on hand. How? The Washington Post has a more diverse business model than the other companies mentioned, -- including
, educational services (Kaplan), and stakes in television broadcasting.
(Don't miss "
" and "
2. Upgrade Cycles
Upgrade cycles occur when existing products or technologies are replaced with new or more advanced products. In the music industry, about 20 years ago, we had an upgrade cycle from the vinyl record to the compact disk (CD). Now we are in the midst of an upgrade from CDs to digital music (downloadable file formats like MP3). Similarly, in world of watching movies at home, the video cassette recorder (VCR) was upgraded to the digital video disc (DVD) about 10 years ago. Now we are seeing an upgrade from DVDs to Blue Ray (high definition) DVDs. Every few years we have video game console upgrades and so on.
The current (and next) upgrade cycle is going to benefit media and retail companies which are able to:
Sell-out existing inventory while offering new products. If you go into any Best Buy , you can buy your favorite titles on DVD at cheap prices, while also buying a Blue Ray player and Blue Ray discs. Best Buy gets you coming and going.
Roll-out old titles in the new format. Remember all of those old classics which Walt Disney put back into the "vault" a few years ago? Those "oldies but goodies" will be remastered and reintroduced in Blue Ray format.
3. Business Model Changes
As mentioned in "
," consumers want to make their own choices. Furthermore, consumers want what they want, when they want it and without interruption - especially when it comes to media and entertainment..
While the broadcast television set was successful in supplanting the radio, over 50 years ago, as the primary form of home entertainment, technological and societal changes now put that business model at risk.
While there are a handful of broadcast networks, cable networks now number in the hundreds and can be targeted to specific geographies and other demographics. More and more people are signing up for cable TV, which offers high-definition programming, along with other features, such as digital video recording (DVR), pay-per-view and on-demand. Furthermore, such companies as
have invested billions of dollars to bring fiber optics into the home. This allows those companies to offer "triple play" packages that include cable TV, high speed Internet access and telephone service.
The cost to produce broadcast programming is tremendous and the networks attempt to recoup that expense and generate net profit in the form of high advertising fees. The primary problem is that broadcast ratings are going down.
Advertisers expect a certain return on their dollar and are not getting that return from broadcast TV. As a result, advertisers are using targeted campaigns on cable TV or through Internet click and placement optimization. This allows the advertisers to focus their spending and even pay only when a targeted audience reacts (clicks) on an advertisement.
There are several potential winners and losers, as a result of this sea change.
(which split into
) produces content for cable TV and the movie industry, while CBS is involved in radio, broadcast TV, publishing and outdoor advertising. Sounds like a good media/bad media segregation to me.
will probably benefit from its "triple play" and cable operation, but the company still has a huge amount of debt and is suffering from the AOL fiasco from nearly a decade ago.
has broadcast TV and cable operations and the company has been effective at migrating some of its shows from one format to another. In addition, the integrated theme park and resorts businesses will favor Disney over the theme park-only competition like
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Ahead Of The Bell: Six Flags Bankruptcy Fears Grow
For more on Six Flags' poor financial health, check out these lessons from the Finance Professor Archives:
"Balance Sheets: The Good, the Bad and the In-Between" (August 2007)
"Companies That Might Not Survive This Crisis" (February 2009)
is the big beneficiary from the Internet advertising boom. Companies such as
( OMTR), which provide online marketing optimization services will also benefit.
Balance Sheets Matter -- Now More Than Ever
Cash with little or no long-term debt, little reliance on "commercial paper" (short-term debt) and strong cash flow are all important. When you look at the potential winners and losers in this article, it should come as no surprise that, in general, the future winners have stronger balance sheets than companies with decaying business models. Certainly that is not always the case, as I have
, Time Warner's balance sheet is not in good condition (its
is a negative 1.45). Viacom is also saddled with a huge amount of debt, with a borderline z-score of 2.76. Though Disney has $12.2 billion of long-term debt, the company's z-score is still strong at 3.12.
Identify companies that are on the frontline of a macro shift from one technology to another. Ask yourself: How are they managing the changes?
Identify upgrade cycles and try to capitalize on them.
Separate companies with strong balance sheets from companies with weak ones.
At the time of publication, Rothbort was long GOOG, although positions can change at any time.
Scott Rothbort has over 20 years of experience in the financial services industry. In 2002, Rothbort founded LakeView Asset Management, LLC, a registered investment advisor based in Millburn, N.J., which offers customized individually managed separate accounts, including proprietary long/short strategies to its high net worth clientele.
Immediately prior to that, Rothbort worked at Merrill Lynch for 10 years, where he was instrumental in building the global equity derivative business and managed the global equity swap business from its inception. Rothbort previously held international assignments in Tokyo, Hong Kong and London while working for Morgan Stanley and County NatWest Securities.
Rothbort holds an MBA in finance and international business from the Stern School of Business of New York University and a BS in economics and accounting from the Wharton School of Business of the University of Pennsylvania. He is a Term Professor of Finance and the Chief Market Strategist for the Stillman School of Business of Seton Hall University.
For more information about Scott Rothbort and LakeView Asset Management, LLC, visit the company's Web site at
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