Profiting from our playtime

Entertainment stocks, while volatile, have gone gangbusters for investors

They are among the most important companies in our personal lives. They make us laugh, weep, soothe us to sleep, take us on cruises and roller-coaster rides. They are the hundreds, perhaps thousands, of entertainment companies in the United States and abroad making products from movies to theme parks to CD players.

Despite their popularity, these firms are not always embraced by investors, given their volatility, organizational complexity, high valuation levels and, in the case of their film divisions, bookkeeping confusion. When it comes to entertainment-industry stocks, the rule is invariably, "buy them on a case-by-case basis."

Still, they are far better liked than disliked among professional market analysts. "While there are high risks attached to movie operations, the diversity these companies afford - in such things as theme parks and publishing - make them attractive to many investors," says Arnold Kaufman, editor of "The Outlook," a review published by Standard & Poor's Corp.

One reason they should be attractive: The Dow Jones entertainment index is up 36 percent for the year through May 30, the best performance of any subsector in Dow Jones' US consumer cyclical group.

Still each entertainment company, analysts say, must be looked at separately.

Film revenues, as Monday morning newspaper stories tell us, can be enormous. Yet profits often arrive much more slowly, reflecting the broader operations of the companies themselves, as well as the huge costs associated with filmmaking.

Consider "The Mummy Returns," which has had the highest three-day opening this current spring/summer movie season ($68 million). The film was released by Universal, now part of Paris-based Vivendi Universal. The stock, listed on the New York Stock Exchange, is up about 1 percent this year.

Stock in Walt Disney, whose blockbuster "Pearl Harbor" took in $75 million over the four-day Memorial Day weekend, actually lost value in recent days of trading, although it is up 12 percent for the year. AOL Time-Warner, whose Home Box Office unit broadcasts the enormously popular "Sopranos" TV show tumbled more than 2 percent on May 29, although the company's stock is up more than 46 percent for the year. Oh yes, it has a price-to-earnings ratio of about 113.

"We carry no entertainment stocks at present, in large part because of their high valuations" and frequent volatility, says Dan DeMonica, who manages two Armada Value Funds, one for large-cap companies, one for small-cap firms.

Mr. DeMonica's reservations are not unique. Martin Schulz, who heads up an international stock fund for Armada, does carry two entertainment companies - Sony from Japan and Vivendi. But their inclusion is not just for their film divisions, he notes. Vivendi is a huge conglomerate with interests in water and environmental projects. Sony is in just about everything linked to entertainment, from handheld music and game devices to movies from Columbia Pictures.

"Next to Coke, Sony is one of the most powerful brand names in the world," Schulz says. "Sony has the ability to provide many different elements of entertainment."

Of the major US film companies, a number are now controlled by non-US firms, or global firms with a smaller US presence (Universal, Columbia, Fox). Many of the remaining US film studios are part of giant conglomerates.

Warner Brothers and New Line are part of AOL Time-Warner; Paramount along with CBS, Infinity Broadcasting, MTV, Nickelodeon, Showtime, Simon & Schuster, and 82 percent of Blockbuster help make up Viacom Inc; Touchstone and Miramax are part of Disney.

"These companies are so huge that their film units are often just small parts of their total operations. And that includes Disney," says an analyst with information firm Morningstar Inc. in Chicago. In fact, Morningstar does not even list Walt Disney as an entertainment firm. "We treat it as any other conglomerate," the analyst says.

Most index funds, not surprisingly, carry significant numbers of entertainment stocks, since they mirror the entire market represented by their index. But among the other funds that carry entertainment stocks, few have more than one or two holdings. Moreover, entertainment companies tend to make up only 5 percent or less of total assets in most mutual fund.

So if investors want to stock up on entertainment issues, they have two main choices:

1. Tap an information firm such as Morningstar or Value Line to find out which mutual funds carry entertainment stocks.

2. Purchase individual companies through a brokerage service. According to rating service firm Zacks, for example, a majority of market analysts who track the biggest three US conglomerates - AOL Time-Warner, Viacom Inc., and Walt Disney - suggest a "moderate buy" for these companies. That's a middle-of-the-road position.

One final note: Analysts are currently wary of movie-theater chains, since at least 11 of them, by one count, have had to file for bankruptcy protection in the past year, a result of overbuilding within the industry. Chains filing for bankruptcy protection include Carmike Cinemas, United Artists, and General Cinema. Mergers and consolidations are considered likely.

(c) Copyright 2001. The Christian Science Monitor