A break in tradition for 2007

Apple leads new-media charge; congloms have seen better days

Old media should be ashamed of itself.

Last year was a good one for The Hollywood Reporter Showbiz 50 stock index, but only because new-media stocks outperformed the broader markets by such a wide margin that they made up for the lousy performance from traditional media.

The Showbiz 50 rose 11.5% in 2007, trouncing the S&P 500's 3.5% advance. Yet just 13 stocks on the Showbiz 50 moved higher during the year, a majority of them being new-media stocks.

Leading the pack was Apple. The company's iTunes-iPod juggernaut helped it to a 134% gain in 2007 while most other music-related stocks plummeted. Warner Music Group and Napster, for example, fell 73% and 46%, respectively. Stock in RealNetworks, which runs the Rhapsody subscription-music service, dropped 46%.

Besides music, another losing theme last year was radio. Stock in Emmis Communications, operator of about two dozen radio stations, fell 53%, while stock in radio content company Westwood One dropped 72%.

Even Sirius Satellite Radio and XM Satellite Radio couldn't gain traction despite their intention to merge and save millions of dollars in costs. Sirius fell 14% in 2007, and XM lost 15%.

The biggest radio operator, Clear Channel Communications, fared better, losing just 1% on the year, though its stock price is propped up by a going-private offer of $39.20 a share.

Home video and cable TV were losers last year as well. Movie Gallery was the worst performer on the Showbiz 50, its stock losing more than 99% of its value during the year. Blockbuster lost 26%.

In cable television, sector biggie Comcast saw its shares fall 35%, Cablevision Systems lost 14% and Charter Communications plunged 62%.

Theater operators didn't fare so well, either, with the exception of giant-screen company Imax. Its shares rose 81% in 2007 and were the index's second-best performer after Apple. Carmike Cinemas, however, sunk 62% and Regal Entertainment fell 10%.

As for big media, only Sony pulled its weight, rising 27% in 2007, though many analysts credit the move to its new-media asset, the PlayStation 3, and downplayed its old-media movie studio despite successes with "Spider-Man 3" and "Superbad."

Beyond Sony, the entertainment conglomerates dragged the index lower, with Viacom up 7%, while Disney, News Corp., CBS Corp. and Time Warner all fell on the year.

Gainers cracking the index's top 10 in 2007 also included TiVo (up 62%), Dolby Laboratories (60%), Discovery Holding (56%), Google (50%), Liberty Media (19%), Gemstar-TV Guide (19%) and Electronic Arts (16%).

At the other end, the 10 leading decliners included Young Broadcasting, which lost 63%, and Martha Stewart Living, down 58%.

Despite Time Warner's dismal performance, losing 23% in 2007, and Disney's listlessness, off 5%, analysts are predicting both will be good investments for 2008.

A panel on CNBC's "Fast Money" last week raved about Disney, saying that after the stock spent a year going nowhere even as its business improved, it's poised for a 20% gain during the next 12 months.

Steve Birenberg, a columnist at theStreet.com and money manager specializing in media stocks, similarly calls Disney "interesting" for 2008, given it was a loser in 2007 after "they did pretty much everything right, with earnings per share growing over 20% and the content generation engine consistently generating hits."

David Miller of SMH Capital also calls Disney a top pick in 2008. He likes that "Desperate Housewives," "Lost" and "Grey's Anatomy" are headed for international syndication and that sports programming, where ESPN dominates, isn't hurt by the proliferation of ad-skipping DVRs.

But Bear Stearns analyst Spencer Wang disagrees, arguing that Disney ought to continue to go nowhere. Wang, in fact, rates the entire entertainment sector "market underweight" in 2008.

Wang argues that TV usage, for maybe the first time ever, will decline in 2008, especially among the 18-49 demographic, probably because of the fact that more than 53% of U.S. households are hooked into broadband Internet and have less time to watch TV.

He also said "the home video market, a major driver of filmed entertainment growth over the past decade, appears to be running out of steam." And the next-generation DVD replacement cycle is stymied because of a format war that most consumers don't want any part of. International and digital growth, while rapid, doesn't suffice, either.

The analyst does, however, see upside for Time Warner and especially Viacom next year.

For Viacom, he sees a ratings turnaround at its cable business and affiliate revenue growth. His target on Viacom shares is $49, suggesting that the stock will gain 11% in 2008.

For Time Warner, Wang's bullish thesis is that the new management will "aggressively restructure the business portfolio." He has a $24 target on shares, suggesting a 45% gain in 2008.

In fact, several analysts are predicting that Time Warner will sell off AOL and its Time magazine units, allowing newly installed CEO Jeffrey Bewkes to focus on the cable TV networks and film studios. The company also might spin off Time Warner Cable, of which it owns 84%.

Among big-cap stocks, Birenberg likes News Corp. because of a turnaround at Sky Italia, the monetization of MySpace, higher affiliate fees at Fox News Channel and the elimination of restructuring costs at its U.K. newspapers.

But Birenberg is especially bullish on Central European Media Enterprises, which he calls "the best play on the rapidly growing consumer economies in Central and Eastern Europe where advertising growth will average around 20% in 2008."

Trading on Nasdaq, Central European Media Enterprises rose 66% in 2007 and would have easily made the top 10 had it been a member of the Showbiz 50 index. The company probably is a takeover target, according to Birenberg, which will help it extend those gains into this year. "Any big media company involved in TV broadcasting would be interested — CBS and News Corp. in particular," Birenberg said.

Birenberg added that he was badly burned on Comcast in 2007 but that shares are headed for a rebound in 2008 if the company can resume free-cash-flow growth and moderate capital spending.

But, Birenberg added, "management credibility is very low, so Wall Street will be in a prove-it-to-me mode for a few quarters."

Wedbush Morgan Securities analyst Michael Pachter said Blockbuster is a top pick of his, and if his $8 target is reached, shareholders will see a whopping 105% gain this year. Part of his bullishness comes from the near demise of Movie Gallery, a competitor whose store closures will have customers migrating to Blockbuster.

Pali Research analyst Richard Greenfield said two of his best ideas for 2008 are Discovery Holding and Cablevision Systems.

Greenfield likes Cablevision in part because 50% of its subscribers are in a triple-play bundle, compared with Time Warner Cable at less than 20% and Comcast at less than 15%.

As for Discovery, he put a $35 target price on shares three months ago, suggesting that the stock will advance 39% this year, presumably as the company restructures.
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