Investors 'cautious' on biz

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NEW YORK -- Goldman Sachs has turned bearish on big entertainment stocks, downgrading its sector view from "neutral" to "cautious" due to increased chances of an economic slowdown in the U.S., the recent credit crunch and a lack of growth engines.

As a result, analyst Anthony Noto on Wednesday cut his price targets on various sector giants and picking DreamWorks Animation as his favorite stock in the industry. He also highlighted shares of the Walt Disney Co. and News Corp. as having better upside potential than others in the sector.

Noto reduced his price target on Time Warner Inc., the world's largest media company, by $4 to $21 and dropped Viacom Inc.'s by the same amount to $43. He also cut his Disney target by $3 to $42 and his CBS Corp. target by $2 to $30, while leaving his targets for DWA and Warner Music Group unchanged at $37 and $12, respectively.

In his sector downgrade report, Goldman's Noto cited "concern that we will see fewer operating and financial levers/benefits going forward and a greater-than-expected U.S. economic slowdown than what is implied" in 2008 media earnings estimates.

He also referenced the recent credit crunch, saying that debt has became cheap over the past few years, which has changed investor and corporate behavior to boost stock prices.

The recent crunch will cause a "slower-than-expected economic and thus advertising growth environment, but also less financial maneuvering to add shareholder value," Noto argued, adding that trading multiples could contract for some "as the flexibility for break-ups declines."

As a result, he suggested that investors avoid companies with much advertising exposure and limited international revenue.

DreamWorks Animation is "the most favorably positioned entertainment company in our coverage universe against these themes with above-average international revenue exposure at 44% versus an average of 24% among our covered large-cap media names, limited cyclical exposure versus an average of 51% across our covered large-cap media names and benefits from secular and content-driven revenue growth," the analyst wrote.

About Disney shares, he said they have "the potential to appreciate even in a decelerating economic environment given our estimates and growth outlook assume conservative estimates in cyclically exposed businesses, such as theme parks with drivers of growth coming from content-driven success."

Noto said he also likes News Corp. for its lower relative exposure to cyclical factors, such as advertising, and significant international business.

Also on Wednesday, Barrington Research analyst James Goss said that most of this year's media and entertainment deals have been driven by defensive reasons, such as taking companies private because the stock market doesn't see enough growth momentum in them. Plus, his firm's media stock indices largely underperformed general indices in August.

So, where should media investors turn? "We have felt creation and control of content remains valuable," Goss said, pointing to Viacom, Time Warner and CBS, "and we have warmed to television broadcasters based on some positive fundamental developments plus the impending return of political dollars."
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