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| | Street Patrol
And the Oscar-winning stocks are . . .
The entertainment industry's big night is Sunday, but what really matters to the markets is the coming attractions. Warner, with its 'Harry Potter' franchise, and Disney look like the likely hits.
By Robert Walberg
Ethel Merman was right. Theres no business like show business. The glamour, the celebrity, the money. Especially the money.
The biggest stars are paid $20 million or more per picture, movies routinely cost $100 million to produce, and on Sunday the industry will spend a kings ransom to celebrate its very existence.
While the 76th annual Academy Awards ceremony itself promises to be as uneventful as it is long, there will be a small pot of gold at the end of Finians Rainbow for several of the film production companies. Movies that do well on Oscar night typically earn more at the box-office. For smaller films such as Mystic River or Lost in Translation, an Oscar could mean a material jump in ticket sales, and that would be good news for the public companies that released them, which were Time Warner (TWX, news, msgs) and Vivendi Universal (V, news, msgs). A big night for Lord of the Rings: The Return of the King would lead to less of a bump, as the movie has already grossed hundreds of millions, and its unlikely that winning a Best Picture award would compel moviegoers to see the film again.
So which films and which companies are best positioned to benefit? After seeing all the major films nominated this year and having won numerous Oscar-picking contests, my predictions for the major awards are The Lord of the Rings, for best picture and director; Lost in Translation for actor and original screenplay; Monster for actress; Mystic River for supporting actor and adapted screenplay; Cold Mountain for supporting actress; and Finding Nemo for best animated picture.
Since no movie will sweep, this years post-Oscar bump will be relatively small, and only entertainment conglomerates Time Warner, Vivendi, and to a lesser degree Pixar (PIXR, news, msgs), will garner any gains at all. The first two derive only a modest percentage of total sales and earnings from films, and traders have already factored in the potential Academy Award boost for weeks.
The coming attractions
So moviegoers/investors should turn their attention instead now toward companies that have the potential for big profits as the year progresses. One sure hit will be Shrek 2. Unfortunately, thats going to be released by the privately held DreamWorks SKG, so theres no direct play. Studios that appear poised for big years, however, are Time Warners Warner Bros., Walt Disney (DIS, news, msgs), Miramax and Touchstone Pictures, and Vivendis Universal Pictures.
Warner Brothers is set to score big with "Harry Potter and the Prisoner of Azkaban", "Catwoman", "Scooby-Doo 2", "A Sound of Thunder", "Alexander" and "The Polar Express." Disney and company hit the big screen with "Kill Bill Vol. 2", "Mindhunters", "Cinderella Man" (starring Russell Crowe) and the sequel to "Bridget Jones' Diary." Universal has a series of potential hits in "Chronicles of Riddick", "The Bourne Supremacy" and "Meet the Fockers," a sequel to "Meet the Parents."
Related news and commentary on MSN Money
The only sure hit that Sony's (SNE, news, msgs) Columbia Pictures will spin is "Spider-Man 2", while Metro-Goldwyn-Mayer (MGM, news, msgs), Lions Gate Entertainment (LGF, news, msgs), Fox Entertainment's (FOX, news, msgs) 20th Century Fox, and Viacom's (VIA.B, news, msgs) Paramount Pictures look to have a relatively weak list of films on the near horizon.
Trying to predict what will and wont be a hit is an inexact science, but with the information at hand -- cast, director, screenwriters, past success of franchises such as Harry Potter and Spider-Man -- we at least improve our chances of getting it right. To distinguish between this years winners and losers, we need to do more than see the movies, predict the Oscars and read the upcoming reviews.
Screening for silver
The entertainment business is volatile and a string of big hits can catapult a companys stock to new highs, while a series of flops can sting for years -- just ask Ben Affleck and/or Michael Eisner. Because of this fact, we want to screen for companies that are in sound financial shape, have demonstrated an ability to deliver solid and sustained revenue growth, are poised for earnings growth in each of the next two years and have a StockScouter rating of at least 5.
Using MSN Moneys stock screener to assist in this effort, I sought profitable, growing, relatively cheap diversified entertainment companies with relatively little debt with better than average StockScouter ratings that were beating analyst expecations and had also outperformed their peers over the past 12 months. Although the initial pool of candidates was 10 stocks, I ultimately ended up with two: Walt Disney and Time Warner. (To see the full screen, click here. The screen uses this criteria: Return on equity > 3; Price/sales ratio < 2; Recent Qtr. Earnings Surprise > 10%; Expected EPS Growth Next Qtr. > 10%; StockScouter Rating > 5.)
| And the winners are . . . | | Company Name | 2/25 Price | Debt/Equity | ROE | Price/Sales | SS Rating | Qtr Surprise % | % Growth
Next Yr | % Price Chg
Last Yr | | Walt Disney (DIS, news, msgs) | 26.3 | 0.45 | 7.4 | 1.9 | 9 | 50 | 17.2 | 52 | | Time Warner (TWX, news, msgs) | 17.53 | 0.46 | 4.8 | 1.9 | 5 | 60 | 19.9 | 53 |
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With a slew of potential hit films and the kind of financials and price momentum that are the envy of the red carpet, investors who grab hold of Time Warner and Disney shares should have plenty of reasons to applaud for when the year is done.
Editor's Note: At the time of publication, Robert Walberg did not own or control shares in any of the stocks mentioned in this column.
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