Stocks Caught In Downdraft

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Stocks reeled last week — the first week of trading since the attacks on the World Trade Center and the Pentagon — and cable operators and networks scrambled to halt the possibility of an investor panic.

The Dow Jones Industrial Average plunged 684 points on Monday — its largest single-day drop in history — and though the decline tailed off in subsequent trading, the index lost a total of 1,227 points, or 12.8 percent, between Monday and Thursday.

The NASDAQ Stock Market, home to many cable stocks, didn't fare much better: It lost about 224 points in that time frame, or 13.2 percent, as investors bailed from airline and insurance stocks and practically everything in between.

Cable operators were relatively stable, with four-day losses mainly in the single-digit range. The biggest loser for the week among MSOs was Adelphia Communications Corp., which dropped 17.2 percent, or $5.55 per share, between Sept. 10 and Sept. 20. Charter Communications Inc. was a close second, losing 16.9 percent of its value, or $3.34, in the same time frame.

But there were some exceptions to the rule: MSOs AT&T Corp. and Cox Communications Inc. actually reported gains in the period. AT&T's stock rose 2.3 percent in the span, from $17.65 to $18.06. Cox also reported a modest gain, rising 0.5 percent, or 21 cents per share, to $39 from $38.79 each.

Those gains appeared to reinforce several analyst reports issued during the week that touted cable's stability, even during volatile markets.

Salomon Smith Barney Inc. analyst Niraj Gupta wrote that cable has consistently outpaced the rest of the market in times of economic turmoil, adding that the sector has outperformed both the Standard & Poor's 500 and the NASDAQ during the last recession and during the Persian Gulf War.

To demonstrate that strength, Gupta said a worst-case scenario of 2-percent to 3-percent increases in cable ad spending and a 20-percent reduction in estimated 2002 new-service growth would result in just a 5-percent reduction in 2002 estimates of year-over-year cash flow, or growth of 8 percent to 9 percent.

"We continue to view cable as a safe haven for investors," Gupta wrote.

Banc of America Securities Corp. analyst Doug Shapiro also was bullish on MSO stocks, adding that at these depressed prices, cable operators represent a substantial bargain.

Shapiro wrote that cable stocks are trading at between 11 times and 15 times estimated 2002 cash flow, near the bottom of their four-year range.

But while Shapiro and Gupta remain bullish, Credit Suisse First Boston Corp. analyst Laura Martin downgraded 11 media and cable stocks to "hold," — including operators Charter, Cox, Comcast, Insight Communications Co. and Mediacom Communications Corp. She also downgraded programmers Viacom Inc., USA Networks Inc., Crown Media Holdings Inc. and The Walt Disney Co.

Programmers endured substantial losses last week, as investors became increasingly concerned over the fate of the advertising market. Every stock in the sector posted double-digit percentage losses. Disney was one of the biggest losers, falling 28 percent in the period to $16.98 from $23.58.

Disney — which is particularly dependent on advertising revenue through its ABC Inc. broadcasting and cable-network holdings — was dealt a double-whammy because of its theme parks, which investors feared would be adversely affected by an anticipated decline in air travel.

TRAVEL DEAL HITS USA

USA Networks Inc., which said that advertising accounts for only 15 percent of its total revenue, fell nearly 22 percent on the week — mainly because of a pending deal with Expedia.com, a travel-related Web service.

Other advertising-dependent stocks — like Viacom Inc., which derives roughly 50 percent of its total revenue from advertising sales — plunged more than 21 percent during the week, prompting management to issue a statement to alleviate investor concerns.

In a prepared statement, Viacom president and chief operating officer Mel Karmazin said that around-the-clock coverage of the Sept. 11 events have significantly increased the costs at CBS, its cable networks and its radio and television stations.

Viacom also lost revenue from the cancellation of the Latin Grammy Awards, National Football League games and the delay of the new fall television season.

Karmazin said Viacom is in ongoing discussions with advertisers about their plans for the rest of the year and beyond. While the company is optimistic about keeping those advertisers, Karmazin said that full-year cash flow will come in slightly higher than last year's results. That is in contrast to earlier projections of double-digit cash flow growth in 2001.

"We continue to believe that Viacom's [cash flow] from operations in 2001 will be the highest in the company's history," Karmazin said in the statement.

Though Viacom's statement didn't appear to have an effect on its stock performance — it fell 50 cents per share on the day of the announcement — a similar move by Gemstar-TV Guide International Inc. appeared to serve its purpose, at least for a little while.

Last Wednesday, Gemstar chairman Henry Yuen held a conference call with analysts to reiterate its third-quarter guidance and to inform investors of its relatively low dependence on advertising.

The pep talk appeared to work. After losing more than 32 percent of its value between Sept. 10 and Sept. 18 — when the stock fell from $25.44 to $17.28 per share — Gemstar stock was up $1.87 per share on Wednesday, closing at $19.15 each. But the good feeling didn't last long, as Gemstar closed at $17.89 per share on Thursday, down $1.26.

In the conference call, Yuen stressed that Gemstar would not be affected by the ad market downturn and that its other businesses were performing above expectations.

Most of Gemstar's ad contracts are locked in, Yuen said, with rate-card advertising — which is subject to adjustment — accounting for only 5 percent of overall revenue.

Of that 5 percent, Yuen said, a small percentage is expected to be lost, probably in the single digits.

The performance at its magazines and TV Guide Channel was hurt though, and Yuen said that ratings for the TV Guide Channel dropped "drastically" once viewers turned their attention to news programming.

But Yuen added that performance at both the magazine and the TV Guide Channel was better than expected prior to the Sept. 11 disaster.

"Generally we don't believe Q3 will be impacted at all on an overall or on a sector basis," Yuen said during the conference call. "We have strong positive cash flow and a very strong cash position. We feel that our stock price is unfairly positioned at this point. This is probably because of a lack of understanding of our real business."

UBS Warburg LLC media analyst Christopher Dixon revised downward his 2002 cash-flow estimates for AOL Time Warner, Disney, Viacom and USA Networks, while stressing that these stocks now represent a buying opportunity for investors.

In a report, Dixon dropped his 2002 cash-flow estimates for the sector by 10 percent on average. Disney's was the largest revision (down 20 percent) and AOL Time Warner the least (down 6 percent). But while Dixon does not expect the advertising market to begin a recovery until the third and fourth quarter of 2002, he raised his rating on USA Networks (from "buy" to "strong buy) and maintained his "strong buy" ratings on AOL and Viacom and his "buy" rating on Disney.

Publicly traded shares in interactive television companies, which have fallen sharply this year due to slow MSO deployments and the sagging economy, continued to slide after the terrorist attacks.

One of the most affected was Wink Communications Inc., whose stock fell below $1 for the first time ever on Wednesday, closing at 95 cents. The NASDAQ exchange, on which Wink is traded, warns companies that they face de-listing if their stocks trade below $1 for 30 consecutive days.

The stock continued to slide Thursday, closing at 89 cents. A spokesperson declined to comment on any steps Wink may take to maintain its NASDAQ listing.

Shares in interactive TV company WorldGate Communications Inc. dropped from $2.50 on Sept. 10, the last trading day before the terrorist attacks, to $1.75 Thursday.

OpenTV Corp. stock dropped from $6.45 on Sept. 10 to $4.09 Thursday. Shares in Liberate Technologies, another middleware vendor, fell from $13.64 on Sept. 10 to $12.27 Thursday.

Steve Donohue contributed to this report.

<p>Company</p><p>9/10</p><p>9/17</p><p>9/18</p><p>9/19</p><p>9/20</p><p>% Change</p>

Gemstar-TV Guide

$25.44

$19.01

$17.28

$19.15

$17.89

-29.7%

Disney

23.58

19.25

18.40

18.50

16.98

-28

Liberty Media

14.25

12.00

11.95

11.70

10.95

-23.2

USA Networks

23.07

18.45

16.55

19.25

18.04

-21.8%

News Corp.

30.75

26.40

24.45

24.65

24.10

-21.6

Viacom

37.90

33.00

31.90

31.40

29.78

-21.4

Fox Entertainment

23.10

19.85

18.89

18.40

18.35

-20.6

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