< But as the stocks of Google and Yahoo soar, the media...

< But as the stocks of Google and Yahoo soar, the media behemoths will come under increasing pressure to behave more like the grown-up companies that they are. And they have little choice other than to strengthen their relationship to the Internet.

"You have to make sure you are where your consumer is," said Gail Stein, the client communications director at OMD, an advertising agency. "And it is easier to determine return on investment in a direct media." >

Growth or Value? Media Stocks Seem to Be Neither

By GERALDINE FABRIKANT - (NY Times)
Published: August 1, 2005

Is it time for media companies to finally grow up?

Movie theater attendance is caught in a two-year downward spiral. Sales of DVD's, once the growth engine for the entertainment business, are slowing. And worse, more advertising is going to the Web, where companies can better quantify consumer reaction to commercials.

This is more than just the summer of the industry's discontent. Media companies, once hot growth stocks, are facing a long-term future of slower revenue growth that may make them more appealing to value and income investors. But some industry observers argue that they are not behaving enough like value or income stocks, which are often characterized by robust dividends and stock buyback programs.

"We have seen it in other industries over time," said Michael Nathanson, a media analyst at Sanford C. Bernstein & Company. "What happens is that companies need to adjust their own behavior to recognize that their base is changing."

As a result, investors unhappy with the industry's prospects have generally fled the sector. But they have not yet been replaced by investors searching for value and income.

"We call this growth purgatory," he said. "Investors looking for more growth trade out of their media holdings, and investors looking for cheapness or value are not on board. That is partly because the attributes of value companies, like dividends and stock repurchases, are not yet a big enough part of those companies' capital plans."

The average dividend rate for stocks in the Standard & Poor's 500-stock index is 2 percent, but no top media company matches that. For example, the News Corporation, with a stock that closed Friday at $17.34 a share, pays a 10-cent dividend. Disney pays 24 cents on a stock trading at $25.64 a share. Time Warner pays 20 cents a share with its stock trading at $17.02 a share, and Viacom pays 0.9 percent, or 28 cents a share, on a stock that closed Friday at $33.49 a share.

As for buybacks, major media companies are increasing their share repurchase programs. For example, the News Corporation just announced a $3 billion share repurchase, which is twice as large as its 2001 program, and Viacom's current $8 billion buyback plan dwarfs former programs.

So far this year, Disney has announced $15.4 billion in stock repurchases. Only Time Warner has no plan, though its chief executive, Richard D. Parsons, has said it is something the company will consider.

When those stocks were on a tear, investors did not care. Mario J. Gabelli, whose family of mutual funds and hedge funds has long been a major investor in media companies, said, however, that "in a world of uncertainty of the last two or three years, the dividend portion of the total return has taken on greater importance."

Some investors compare today's media companies to the "Nifty Fifty" in the early 1970's. That was a group of hot growth stocks like Xerox, Polaroid and Avon that had led the market for some time. But after the market weakened during that decade, they all underperformed.

Time Warner, Viacom, the News Corporation, Disney and some smaller entertainment companies have the glamour of big-time, brand-name film and television properties that audiences love, from Superman to Harry Potter. Children still flock to Nickelodeon while teenagers and young adults continue to devour People and In Style.

But investors no longer find the stocks of the parent companies as sexy as they once did. Three years ago, the big media companies traded at a premium to the market of 25 times earnings when the S.& P. was at 23 times earnings. Today they are trading at 14 times earnings, below the market average of 16 times earnings, said Richard A. Bilotti, a veteran media analyst at Morgan Stanley.

And the glory days - when media companies simply added subscribers and revenue as millions of homes signed up for MTV, the Disney Channel and Home Box Office - are over.

"The industry has delivered on two promises," said Leo J. Hindery Jr., the former chief executive of AT&T Broadband, who now heads InterMedia Partners. "Most homes in America have access to all the digital services, and the amount of programming has boomed."

From 1993 to 2004, Mr. Nathanson estimates, revenue of the top four media companies grew 10 percent to 23 percent annually. He is forecasting annual revenue growth over the next five years of 5 percent to 6 percent for those same companies.

To be sure, that earlier torrid performance was not all organic growth. It was also the result of mergers, many of which did not pay off. Anthony Noto, a Goldman Sachs media analyst, points out that for most media companies, the return on invested capital is lower than the cost of capital, because they made acquisitions that failed to generate sufficient returns to cover the costs of the equity and the debt used for the purchases.

"If your returns are below your cost of capital, the best thing to do with your money is to give it to shareholders, because that is a direct return without risk," Mr. Noto said. "The acquisitions were either too expensive or the hoped-for synergies did not materialize."

Whether or not the media companies choose to do that, they are all attempting to focus on their faster-growing businesses, or to strengthen their relationship to the Internet, in an effort to benefit from advertisers' growing enthusiasm for that medium.

And analysts have differing views about who is best positioned for the future. Some believe that the News Corporation, which has promising international properties like Sky Italia and StarTV, with the potential for foreign expansion, will benefit.

Two weeks ago, Rupert Murdoch, the chairman of the News Corporation, agreed to pay $580 million for Intermix, the parent company of MySpace.com, a social networking site that has more than 16 million users. The purchase reflects Mr. Murdoch's edict that his top staff get serious about the Internet.

Meanwhile, Time Warner is attempting to transform its America Online service into a free Internet portal that is compelling enough to attract traffic and advertising, as its rivals, Yahoo and Google, have done. If the transformation is a success, it will make Time Warner the only old media company with a major growing and well-integrated Internet holding.

Viacom is splitting itself into two companies in its own effort to distinguish its faster-growing cable network unit from the slower-growth television businesses. And it is tweaking its core businesses in an effort to expand their online presence. For example, in an effort to revive CBSNews.com, it is introducing a Web log to provide commentary on CBS newscasts.

Disney, meanwhile, is betting on better attendance at its theme parks and a turnaround at ABC.

But as the stocks of Google and Yahoo soar, the media behemoths will come under increasing pressure to behave more like the grown-up companies that they are. And they have little choice other than to strengthen their relationship to the Internet.

"You have to make sure you are where your consumer is," said Gail Stein, the client communications director at OMD, an advertising agency. "And it is easier to determine return on investment in a direct media."

http://www.nytimes.com/2005/08/01/business/media/01value.html?th&emc=th

:)
LC