Program summary
Co-anchor Geoff Colvin was on vacation this week, but there was little rest for weary investors, Karen Gibbs said to open the program.
Increased tensions between the United States and North Korea, continued civil unrest in Venezuela and a recalcitrant Iraq conspired to push crude oil prices to 2-year highs and the dollar to 3-year lows against the euro. Gold, a traditional safe haven, flirted with $350 per ounce.
But it wasn't all gloom and doom. While traditional retailers saw the worst holiday shopping season in over 30 years, online retailers reported a 40 percent jump in holiday sales. The U.S. Commerce Department reported a record number of new single-family home sales, sticking a pin in that housing bubble theory, and a 55-year-old West Virginia contractor became the winner of the largest jackpot ever won by a single ticket holder in the world.
Even after taxes, he'll have enough left over for a wall street shopping spree, and there are some after Christmas bargains to be had, Karen said. For the third week in a row, major market averages gave up ground. Mind you, it was on the lightest volume we've seen all year, but it was still a losing week. The Dow Jones Industrial Average fell over 207 points this week. The Nasdaq Composite Index was nicked for a 14-1/2 point loss, while the S&P 500 shed 20 points.
The Morningstar style boxes showed large-cap core stocks as the worst performer, hurt by citigroup's financial woes and a poor season for retailers:
Just to break even, stocks would have to stage one heck of a really in the last two remaining trading days of the year, Karen noted. The Dow would need to rise more than 1700 points, the Nasdaq close to 602 points and the S&P nearly 273 points just to end the year flat. "If that's too depressing of a thought, maybe we should all just go to a movie," Karen said.
Entertainment and ads
Not since the Eisenhower administration have as many people gone to the movies in a single year as they did in 2002, and it's not just the movies. People spent almost $160 billion on entertaintment this year as they sought comfort in video games, CDs and even books. The average person in America spends 10 hours a day consuming various forms of media. That's why, Karen said, despite the prolonged and well-publicized advertising slump, the new VSS 100 Media Index was down only 5 percent in 2002, far outpacing the S&P 500.
Karen, who sat down to talk about the entertainment industry with a trio of experts: Robert Gensler, manager of T. Rowe Price's media and telecom fund; Jim Goss, media analyst for Barrington Research Associates; and Jim Rutherfurd, executive vice president of media investment bank Veronis Suhler Stevenson, which last month unveiled the Media 100 index.
Among the sectors that helped the VSS benchmark do well compared to the rest of the market, newspaper stocks did well this year because investors flocked to stable companies that pay dividends and are not laden with debt, Rutherfurd said. The newspaper industry also eked out a bit of growth, as did business information services, which grew with end-user spending, rather than advertising, he added.
Television was down only three or four percent for the year. Cable and entertainment suffered despite strong box office results. because of management turmoil and changes in many large conglomerates, Rutherfurd said. Radio stocks did poorly this year although the companies did well on a fundamental basis.
Gensler and Goss agreed that the ad market is recovering. Television advertising did very well, boosted by the fact that it was an election year, Gensler said.
"It's hard to tell post-election how strong the stock market is, but especially for television, a lot of the invenory is already sold out going into next year," Gensler said. "The ad recovery seems to be sustained by many industries."
MGM
Geoff Colvin recently interviewed Alex Yemenidjian, CEO of movie and TV studio Metro-Goldwyn-Mayer, which has been rebounding over the past three years.
Franchises such as the James Bond series make "a lot of difference" because of their ability to spawn sequels and generate revenue from selling foreign distribution rights, Yemenidjian said. MGM last month released the 20th Bond movie. "This is one is going to be extremely profitable," Yemenidjian said.
However, small budget movies such as Barbershop are also important to MGM's profits.
"The objective is for the portfolio to be such that our average investment in our MGM-label pictures is less than $20 million or $25 million," Yemenidjian said. "That doesn't mean all our pictures are small pictures, or that we only make pictures (for) less than $25 million. It's just that if it's more, we try to, in certain cases, sell foreign rights and create a risk-reward profile that we think creates a good downside protection."
Although MGM's movie studio gets most of the attention, the company has three other core businesses. Television production is profitable, steady and predictable, Yemenidjian said. MGM's film library, the world's largest modern movie collection in the world, generates more than $300 million a year in free cash. And MGM has a networks business, with MGM-branded channels and other pay TV channels.
The company would like to own a cable channel outright, Yemenidjian said. "I think it fits well with MGM," he said. "It provides us with vertical integration, it provides us with scale, it provides us with more diversified revenue streams, and it's a good fit from the point of view of creating a value proposition."
Yemenidjian argued against criticism that MGM's ownership is concentrated too much in the hands of one man, billionaire investor Kirk Kerkorian, who controls 80 percent of MGM's voting stock. And despite rumors to the contrary, MGM has never solicited buyers or put itself up for sale since April 1999, Yemenidjian said.
As a standalone movie and TV production studio, MGM has a more difficult time than competitors when it comes to finding multiple distribution channels, Rutherfurd and Gensler said. "The other studios are with larger congolomerates, with cable networks or TV networks that can cross-promote products," Gensler said.
MGM may have some interest for individual investors, but other companies, including Viacom and AOL Time Warner, have very successful studios. AOL Time Warner's studio, with the Harry Potter and Lord of the Rings movies, has had been doing "almost unsustainably well" in recent quarters, Barrington's Goss said.
Big profits can come when studios take a chance, as Warner Brothers did by producing all three Rings movies at a high cost without waiting to see how the first one did, Goss said. But studios are being more cautious to minimize their risk, rather than maximize their profit, he added.
"The way the economics have worked with the AOL Time Warners and the Viacoms is that they've sort of neutralized the film product in a way," Goss said. "They've controlled the budget. They'll own fewer (movies) in a total basis; they'll have more participation, co-produced, co-ventured. … They don't expose themselves to the risk. On the other hand, they don't get the benefit of the great reward unless they take the full chance."
Radio
Karen interviewed Randall Mays, chief financial officer of Clear Channel, which owns more than 10 percent of U.S. radio stations, making it the largest radio operator in the country by far. San Antonio, Tex.-based Clear Channel also owns more than 750,000 billboards, 36 television stations and the world's biggest concert promoter.
Clear Channel became a giant after buying several hundred stations in the late 1990s, but about half of the company's revenue growth has come from existing properties, and half came from acquisition, Mays said. "As we look forward, we certainly like to consider ourselves to be an organic growth business," he said. "Our main focus is on organic free cash flow growth, paying down debt right now and strengthening our balance sheet."
Although people have criticized Clear Channel is too powerful in the radio industry, the company does not own 90 percent of radio, which is the least consolidated of media industries, Mays said.
Clear Channel is starting to see advertising pick up after a slump over the past few years, Mays said. "If you look through the year (2002), each month has started to get progressively stronger," he said. "We're very optimistic right now as we sit here in December of 2002 that as we turn the page on the calendar to 2003, that those trends are not going to go away and that we'll see a positive 2003."
In the concert business, expect to see more musicians touring, Mays said. "Certainly as record sales go down, the concerts allow them to generate additional income," he said. "So I certainly anticipate that, yes, you will see more tours in the futures that you have seen in the past."
Concert promoters like Clear Channel don't set ticket prices, but people shouldn't be surprised if performers raise their prices, Mays said. "You should expect that they're going to try to maximize their revenue potential, just like anybody would," he said.
Being a family business - Mays' brother is president and their father is CEO - is a good thing, Mays said. "We all have the ability to speak very openly and honestly with each other," he said. "And we can absolutely be candid about what the strengths and weaknesses that we perceive in each other. And I think that that allows us to better manage the business."
"Out-of-home" media overall has done better than "in-home" media recently, Goss said. "It's faced with less competition," he said. "People are spending more time in their car, so both outdoor and radio have appealed to that segment."
People should remember that media investing in general offers "tremendous" free cash flow, "great" returns on invested capital and stable franchises, Gensler said. He sees an economic rebound of 4 to 5 percent growth, with advertising growing even faster.
Rutherfurd predicted improvement in the cable TV market, and possibly Internet advertising. DVDs will continue to grow in popularity, as will digital recorders including TiVo, Rutherfurd said.
Next week:, out with the old and in with the new. For the best investments of 2003.
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