Beaten-Down Entertainment Stocks Set To Perform

A series of blockbuster movies this summer is expected to revive Hollywood-related stocks, but it could take more than a few months of strong sales to right the troubled sector, fund managers said.

The recent record-setting, $114-million debut of "Spider-Man" demonstrates hit movies are already drawing plenty of attention, helping to boost consumer spending on leisure and recreation activities at a time when the U.S. economy remains week and the advertising market continues to suffer.

Movie and entertainment stocks are well off their highs, down 17 percent this year after losing 14 percent in 2001, according to Standard & Poor's. Yet most companies are still priced as growth stocks.

"Stocks in this industry are attractively priced," said manager Paul Blaustein of the Whitehall Growth Fund. "It's an above-average growth business that happens to be in the worst downturn in recent memory."

"It looks like the whole entertainment industry is bottoming," said Curtiss Scott, who manages the Touchstone Enhanced 30 Fund. "We're looking at trough earnings now."

Business prospects also are favorable. Hollywood firms offer a proprietary product with a very long life -- two favorable characteristics in any type of business, Blaustein said.

As the entertainment sector springs back to life, investors would do well to treat current conditions as a buying opportunity.

"These companies have seldom been cheap enough for us to buy," said John Buckingham of the Al Frank Fund, which focuses on value stocks.

Below are three stocks managers expect to do well in the long term.

MGM

Metro-Goldwyn-Mayer develops and distributes movies and television programs around the world. Its titles include "Platoon," "Rain Man," "Silence of the Lambs," and the "Rocky" and "James Bond" series.

"With the rise of DVDs it's a great time to own a library, and MGM owns 4,100-plus films -- the largest film library in the world," said Joe Hudepohl of Goldman Sachs, whose growth team manages the Heritage Capital Appreciation Fund.

The library generates about $250 million to $300 million in cash flow each year, said Goldman Sachs' Mike McKee.

New releases "Rollerball" and "Hart's War" have been disappointments for MGM this year, but 2001 was its best year ever at the box office, with $448 million in sales.

Current profits are down because the company is busy stepping up movie production, which is a drain on cash now, but will boost earnings in the long run, Hudepohl said.

MGM -- which many describe as a potential takeover target - also is making efforts to beef up its television production unit and diversify its business line.

At Friday's close of $16.25, shares of the $4 billion company are off 46 percent from their April high of $30.

Analysts expect MGM to lose 45 cents per share this year and another 6 cents per share in 2003. It should earn 23 cents per share in 2004, according to First Call/Thomson Financial.

Fox

Media mogul Rupert Murdoch's Fox Entertainment Group ranges from feature films to TV broadcasting and cable programming.

On the movie front, Fox has had trouble duplicating the popularity of its 1997 "Titanic" release, but "Planet of the Apes" and "Dr. Doolittle 2" proved successful in 2001, said Morningstar stock analyst George Nichols. The animated movie "Ice Age" also has been a hit with moviegoers this year.

"Fox has great exposure to television. We view that as a more stable business than the movie business," said Blaustein, whose Whitehall Growth Fund has a big stake in the company.

Fox has a staple of long-running programs such as "The Simpsons," which continue to attract viewers in prime time and generate added profits through syndication.

At an average age of 33, Fox television viewers are younger than those of the other major networks, which help the company attract advertising dollars.

Ad spending is down again this year, but the downturn won't last forever, Blaustein said. "We think it resolves itself as the economy comes back and corporate profits come back."

Shares of Fox closed at $23.50 on Friday, down 30 percent from a July 2000 high of $34.

Fox, which has a market value of $20 billion, earned 17 cents per share in fiscal 2001. Analysts expect the company to earn 16 cents per share this year and 48 cents in fiscal 2003.

Disney

The Walt Disney Company franchise includes its ubiquitous cartoon characters, as well as theme parks and resorts, film studios, and television and radio networks.

Over the past two years, reduced ad spending hurt revenue at Disney's ABC and ESPN networks, and since the Sept. 11 terrorist attacks, travel fears have slowed business at theme parks.

Yet both of these situations are improving now, Scott said. "The negative forces dragging results down over the last 12 months are starting to reverse themselves."

An April research report form Merrill Lynch predicted Disney's theme parks would be the last of its businesses to recover, given a historical two-quarter lag in demand following a change in consumer confidence.

"Travel was depressed after September, but we don't think that's a long-term phenomenon," said Blaustein, who also forecast improvements for ABC. "You have to turn things over. Very often a network that is third one year, in a couple of years is first."

Since reaching an April 2000 high of $43, shares have dropped 46 percent, closing at $23.15 Friday.

The company, which now sports a stock market value of $47 billion, is worth far more, Scott said.

"It has a great brand name, and it has great assets," he said. "If you looked at it in terms of private market value and took a sum of the parts, you can easily come up with $30 to $35 per share."

Disney earned 98 cents in fiscal 2001. Analysts expect earnings of 63 cents per share this year and 82 cents in fiscal 2003