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Traditional Media Is Out, Analysts Say


 A raft of dismal quarterly results and grim forecasts by U.S. media companies has investors lowering 2009 expectations and looking to smaller players with less exposure to DVDs and advertising.

One bright spot in the quarterly earnings reports was cable operations, whose steady stream of affiliate and subscriber fees should continue to offset a swoon in TV advertising that is expected to last through 2009, analysts say.


As the recession deepens, media sector investors are turning to nimble companies with low fixed costs and non- traditional specialties such as Discovery Communications Inc (DISCA.O) and Scripps Network Interactive Inc (SNI.N), or conglomerates with well diversified businesses.


"The area that we like conceptually is cable networks. I think they are better positioned than the pure broadcast companies and the TV stations," said Larry Haverty, manager of Gabelli Global Multimedia Trust.


Traditional media is out. A flurry of downgrades followed worse-than-expected results by Time Warner Inc (TWX.N), Walt Disney Co (DIS.N), News Corp (NWSA.O) and Viacom Inc (VIAb.N).


CBS Corp (CBS.N) is expected to turn in the weakest performance among the media giants next week because of its heavy reliance on revenue from depressed TV markets.


Disney Chief Executive Robert Iger provoked further angst last week by describing "secular changes" to DVD sales that could portend slower growth even after the recession fades.


As a result, analysts remain divided on whether to hold a position in big media shares or fold.


"The bigger you are, the more you are tied deeply to traditional media and the more you're dependent predominantly on display (advertising) the harder this is going to be for you," said Mike Vorhaus, president of media research firm Magid Advisors.


Merrill Lynch has taken a bearish position on most media and entertainment stocks, seeing no imminent recovery in advertising until "at least mid-2009 and perhaps beyond."


Haverty forecast "dreadful numbers for the next three to four months," but was "reasonably positive that things are going to get better" for News Corp, Time Warner and Disney, whose cable assets are undervalued.


U.S. advertising spending is expected to fall 5 percent to 8 percent in 2009, the worst annual decline in eight years.




Despite diverging views on the fate of big media, both Haverty and Merrill liked smaller media companies with lower fixed costs, such as Discovery, DreamWorks Animation SKG Inc (DWA.N) (Merrill) and Scripps (Haverty).


Vorhaus also picked up-and-coming cable networks with a couple of hot shows as good prospects for 2009, such as Scripps' HGTV and Food Network.


Investors' preference for a haven from uncertainty about advertising has pushed big media shares to their lowest valuations in years.


All five major media companies were trading well below an average 14.29 times estimated 2009 earnings for the sector on Friday. Disney was at 10.76 time forward earnings, Viacom at 6.79, CBS at 3.77, Time Warner at 9.47 and News Corp at 9.34, according to Reuters Estimates.


The smaller picks were trading much closer to a cable sector average of 17.7 times forward earnings, with DreamWorks at 13.53, Discovery at 15.32 and Scripps at 13.6, Reuters Estimates showed.


Big media companies say they have enough cash to weather a long advertising slump and all promised to chop costs and jobs beyond the 2,000 or so positions already eliminated to win back investor favor.


But they are keeping expectations low, with Disney's Iger describing the economy as "the worst of our lifetime," Time Warner forecasting, at best, flat 2009 income, and News Corp sharply taking down its 2009 operating income forecast.


The companies are wise to keep forecasts conservative, said Tom Adams, president of Adams Media Research.


"The real telling thing would be if, after everybody gets conservative about their guidance in the first (calendar 2009) quarter, it comes in lower than that. Then I think it is Depression 2.0," Adams added.





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