Goldman Sachs drops 'R' word

Vid games, Web would likely survive possible recession

Wall Street powerhouse Goldman Sachs expects the U.S. economy to fall into a recession lasting several quarters this year, followed by a gradual recovery in 2009.

The big macro-economic call that attracted attention Wednesday on the Street follows weeks of increasing market talk about a possible recession, which will have an impact on media and entertainment stocks.

Goldman media and entertainment analyst Anthony Noto on Wednesday further cut back his sector expectations, saying the Internet and video game businesses are among the few "attractive" areas of the industry.

"The recent data suggest that the U.S. economy is falling into recession," the Goldman economic research team said Wednesday in its report. "We expect economic activity to contract modestly through late 2008, followed by a gradual recovery in the course of 2009." Fed officials likely are to respond by cutting interest rates further, they said.

In somewhat of a silver lining, the recession likely is to last only two to three quarters and "should be relatively mild by historical standards," the Goldman experts said.

Noto, who likes shares of Google and also has "buy" ratings on shares of Disney and DreamWorks Animation, reiterated his "cautious and below-consensus view across most of the economically sensitive areas of the communications, media and entertainment group."

Based on the recession the his colleagues expect, he reduced his estimates across the industry. "We would avoid those sectors and companies with the most exposure to advertising, deteriorating content or ratings trends, secular audience issues and/or significant competitive factors," Noto said.

In particular, he sees Internet and video game stocks as "attractive," but has a "cautious" view on entertainment and radio, as well as a "neutral" view on cable and satellite TV stocks.

A possible recession also has been a key theme at this week's Citi annual Entertainment, Media and Telecommunications Conference in Phoenix.

Comcast CFO Michael Angelakis was asked Wednesday whether cable really has lost its traditional position as a recession-proof business -- a question investors increasingly have been pondering (HR 12/26).

He kept his options open, replying that "nobody knows." He added: "We'll see how deep this recession really is -- if there is a recession."

Angelakis last month lowered Comcast's 2007 financial guidance, arguing that the sluggish U.S. economy has affected Comcast because of its size and broad reach. On Wednesday, he said churn and bad consumer debt have been moving higher in this environment.

Asked whether Comcast could start paying a dividend to reward investors in a tough economy, he said dividends along with stock buybacks and acquisitions are all options.