Global Equity Research
June 28, 2006
Global Gambits
The Right Moves for Right Now
Media
chapter
See jpmorganSaVanT.com for global sector valuation tools
The following is a chapter from Global Gambits — The Right Moves for Right Now, dated June 28, 2006. This chapter is presented for
convenience, and should be read in conjunction with the full report and its analyst certifications and important disclosures. The full report is
available on MorganMarkets.
June 28, 2006
Global Equity Research
Global Gambits — The Right Moves for Right Now
See jpmorganSaVanT.com for global sector valuation tools
Media
Continuing Shift to Non-Traditional
Global Sector Coordinator
Frederick Searby, CFA, FRM
(1-212) 622-6593
fred.searby@jpmorgan.com
J.P. Morgan Securities Inc.
Full sector coverage details on
page 6
Key Drivers
Our Non-Consensus Views
• Traditional media is squeezed as disruptive interactive
media is rapidly taking share. Advertising is primarily
shifting from print with more modest share losses from other
traditional media. Among traditional media names, we
recommend focusing on solid restructuring stocks and
depressed names susceptible to shareholder activism.
• We believe the impact of new media distribution channels
could be overblown in some adjacent industries. We
recommend Blockbuster as we believe the secular downturn
for rentailers will play out at a more gradual pace.
• We continue to see value in select traditional media names
where the risk/reward is attractive given the historically low
valuation levels. We recommend WPP on the back of its
exposure to emerging growth markets and a number of
advertising catalysts in the balance of 2006. We recommend
CBS on our expectation of above-broadcast industry
average-growth, increasing returns to shareholders and
attractive valuation.
• We continue to believe agencies will garner some of the dollars
shifting out of traditional media but the economics for
agencies as intermediaries in non-traditional, such as paid
search and product placement, will be less than that of
traditional services.
• We maintain our recommendations on ‘non-media’ names,
notably Catalina (OW) and ChoicePoint (OW). In our view,
there continues to be more scope for higher absolute returns in
the smaller, though more volatile, marketing service
companies. Data-centric marketing services companies are
moated businesses that are largely immune or even
beneficiaries of the sea change depressing traditional media
companies’ results and share prices.
2
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Media: Top Picks
Company
CBS Corp
Rating:
Ticker:
Key Financials
Overweight
CBS US / CBS
Rationale and Catalysts
Fiscal EPS (Local): Year-end Dec.
• Despite operating in low-growth businesses, we believe CBS should show in-line to better-than-average growth versus
2005
2006E
2007E pure play peers given its solid TV ratings and improving outdoor margins.
1.56
1.68
1.85
• Given that 18% EBITDA comes from CBS Outdoor, CBS offers exposure to an alternative media segment with aboveaverage growth.
Exchange:
NYSE
Price (Local): US$26.27
Mkt Cap (US$): 20.3 bn
P/E (Calendar)
Analyst:
Phone:
Email:
EV/EBITDA (Calendar)
2006E
8.4
John Blackledge
(1-212) 622-6580
john.blackledge@jpmorgan.com
Catalina Marketing
Rating:
Overweight
Ticker:
POS US / POS
2006E
15.7
2007E • We believe CBS will continue to be aggressive in its return of capital to shareholders, increasing its FCF payout ratio from
14.2 around 45% today to 60-70% by 2008 with further dividend increases over the next few years. With the sale of certain non-
core assets (Paramount Parks and slow-growing radio stations), we also believe CBS may use the proceeds to buy back
stock.
2007E • Finally, CBS trades at one of the most attractive valuations in the group at about 8-9x 2006E EV/EBITDA. This represents
7.9 a 25% discount to its large-cap entertainment peers and a 27% discount to the radio sector. Our DCF suggests this
discount should narrow.
Fiscal EPS (Local): Year-end Mar.
• We continue to believe that POS is on track for exceptional growth in the medium term. After five years of watching this
2005
2006
2007E company stumble, we believe that it has reached a true inflection point.
1.26
1.46
1.40
• While FY07 should be a transitional year for POS largely due to higher D&A (color initiative), FY08 should be an
exceptional year. We project 43% EPS Y/Y growth in FY08 on the back of robust 26% revenue growth.
Exchange:
NYSE
Price (Local): US$28.78
Mkt Cap (US$): 1.3 bn
P/E (Calendar)
Analyst:
Phone:
Email:
Frederick Searby, CFA, FRM
(1-212) 622-6593
fred.searby@jpmorgan.com
EV/EBITDA (Calendar)
2006E
9.3
Overweight
BBI US / BBI
Fiscal EPS (Local): Year-end Dec.
• We believe video rental fears are overdone.
2005
2006E
2007E
• In our view, BBI’s asset sales, store closures/downsizings, and online growth could drive US$6-7/share in value.
(3.20)
0.01
0.27
2006E
19.7
2007E • We believe color printers will allow CMS to take ad dollars and share from other print budgets such as magazines,
20.6 preprints or FSIs. POS should be able to reuse a portion of its older thermal printers in Walgreens, Kmart, and in
convenience store pilots (Murphy USA, Mejier, and GetGo).
2007E
8.6
• Media fragmentation and attendant advertiser fears about breaking past the clutter have made at-the-shelf direct
marketing increasingly important.
• •We see government opportunity emerging for POS (new “On-The-Alert” product).
• FCF should rebound significantly in FY08E as capex should decline from US$100+ million in FY07 to US$40-50 million.
We reiterate our Overweight rating on POS.
Blockbuster
Rating:
Ticker:
• Click-and-brick sales outperformance should continue.
Exchange:
NYSE
Price (Local): US$4.59
Mkt Cap (US$): 0.8 bn
P/E (Calendar)
Analyst:
Phone:
Email:
EV/EBITDA (Calendar)
2006E
5.9
Barton Crockett
(1-212) 622-6426
bart.crockett@jpmorgan.com
2006E
486.3
• We believe BBI has better online margin potential than Netflix. Video rental comps are easier in 2H06.
2007E
17.2 • The secular downturn could be worse than our expectations. There is bankruptcy risk if covenants are missed.
2007E
5.3
Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15, 2006.
3
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Media: Top Picks (cont’d)
Company
ChoicePoint Inc.
Rating:
Ticker:
Key Financials
Overweight
CPS US / CPS
Rationale and Catalysts
Fiscal EPS (Local): Year-end Dec.
• ChoicePoint is beginning to replicate its success in the personal lines business with the emerging commercial lines
2005
2006E
2007E business. The commercial lines business is on schedule to report revenue from its first customer in mid-2006. The
1.79
1.92
2.28 company signalled US$40-50 million in revenue in 3-5 years from the commercial lines business, consistent with our
estimates.
Exchange:
NYSE
Price (Local): US$42.65
Mkt Cap (US$): 3.7 bn
P/E (Calendar)
Analyst:
Phone:
Email:
Frederick Searby, CFA, FRM
(1-212) 622-6593
fred.searby@jpmorgan.com
EV/EBITDA (Calendar)
2006E
10.1
WPP Group
Rating:
Ticker:
Overweight
WPP LN / WPP.L
Fiscal EPS (Local): Year-end Dec.
• We see potential upside to WPP’s top line as recent industry growth estimates are ahead of company’s guidance.
2005
2006E
2007E
• In our view, we could see some margin upside in the balance of the year.
35.97
40.48
50.85
2006E
22.2
• The product pipeline, coupled with share buybacks, could deliver high teen earnings growth in 2007. We forecast
2007E
US$25-30 million incremental revenue in 2007 and 2008 from new offerings in the personal lines insurance and business
18.7
segments.
• The personal lines data analytics insurance business should deliver low teen top-line organic growth.
2007E
• We expect revenue and EBITDA growth to accelerate in the balance of 2006.
8.8
• We believe ChoicePoint’s current share price could be an attractive entry point for investors.
• We believe the mid-term US elections and the World Cup could be catalysts for growth.
Exchange:
LSE
Price (Local): 631.50p
Mkt Cap (US$): 14.7 bn
P/E (Calendar)
2006E
15.6
2007E
13.9
Analyst:
Phone:
Email:
Gareth Davies
(44-20) 7325-7402
gareth.r.davies@jpmorgan.com
EV/EBITDA (Calendar)
2006E
8.9
2007E
7.9
Overweight
RTR. LN / RTR.L
Fiscal EPS (Local): Year-end Dec.
• We believe 2006 revenue guidance will prove conservative on both Reuters’ base business (Core) and its new products
2005
2006E
2007E (Core Plus) driving upgrades and increasing credibility in the 2008 story.
13.80
16.80
23.50
• We see incremental value from the recent JV with CME to create the world’s first anonymous centrally cleared Fx
• WPP is well positioned for a material high growth opportunity in Asia. The company currently generates about 19% of
revenues, including joint ventures and associates, from Asia, with 25% coming from emerging markets including Latin
America, Africa and the Middle East.
• Our January 2007 price target is 771p, which is based on an average of valuaton techniques. Risks to price target and
rating are: (1) acquisition risk; (2) organic growth in 2006 should be within the organic guidance range of 4-5%; (3) US$
exposure impacts the top line; (4) major account losses; (5) loss of key employees; (6) continued consolidation of key
customers; and (7) negative sentiment around stock post recent issue with Citic Guan Group Chinese JV partner.
ReutersGroup
Rating:
Ticker:
Exchange:
LSE
Price (Local):
362.75p
Mkt Cap (US$): 8.9 bn
P/E (Calendar)
Analyst:
Phone:
Email:
EV/EBITDA (Calendar)
2006E
11.1
Craig Watson
(44-20) 7325-9413
craig.watson@jpmorgan.com
2006E
21.6
exchange.
2007E • Our Dec-2006 price target is 450p, which is based on DCF analysis. The key risks to our price target are: (1) the pace of
15.4 recovery in financial information spending; (2) increased competition and pricing pressure; (3) client consolidation; (4)
disintermediation of sell-side headcount; (5) the extent to which new Core Plus product investments generate an adequate
ROI; and (6) value destructive acquisition.
2007E
9.6
Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15, 2006.
4
June 28, 2006
Global Equity Research
Global Gambits — The Right Moves for Right Now
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Media: Stocks to Underweight
Company
Johnston Press
Rating:
Ticker:
Key Financials
Underweight
JPR LN / JPR.L
Rationale and Catalysts
Fiscal EPS (Local): Year-end Dec.
• We are cautious on the fundamentals of the newspaper business as both structural and cyclical issues are weighing on
2005
2006E
2007E advertising.
38.62
38.22
39.62
• In our view, motors and display advertising growth will decelerate in 2006.
• We believe the structural threats to regionals are higher than national newspaper players.
Exchange:
LSE
Price (Local):
452.50p
Mkt Cap (US$): 2.4 bn
P/E (Calendar)
Analyst:
Phone:
Email:
EV/EBITDA (Calendar)
2006E
9.1
Gareth Davies
(44-20) 7325-7402
Gareth.r.davies@jpmorgan.com
Spanish Broadcasting System Inc.
Rating:
Underweight
Ticker:
SBSA US / SBSA
2006E
11.8
• We believe Johnston has limited ability to take material costs from the business in the medium term.
• Our March 2007 price target is 480p, which is based on DCF analysis. Risks to price target and rating are: (1) signs of
2007E material pick up in recruitment advertising; (2) valuation simply perceived to be cheap regardless of tough comparables;
8.8 (3) cost synergies that are pushed through acquisitions made in late 2005 are greater than we expect; and (4) we see a
material step forward in Johnston Press’ digital strategy.
Fiscal EPS (Local): Year-end Dec.
• The four-book average for SBSA’s AQH (P25-54) ratings is down 4% Y/Y (versus down 2% for the industry). Though we
2005
2006E
2007E believe this decline reflects increased competition in the Spanish language category, we note that ratings in the most
(0.21)
0.10
0.01 recent book have rebounded. Nevertheless, if ratings weakness continues, it should pressure top-line growth.
Exchange:
NASDAQ
Price (Local):
US$5.55
Mkt Cap (US$): 0.4 bn
P/E (Calendar)
Analyst:
Phone:
Email:
EV/EBITDA (Calendar)
2006E
19.5
John Blackledge
(1-212) 622-6580
john.blackledge@jpmorgan.com
2007E • There are questions surrounding Johnston’s less aggressive organic digital growth strategy.
11.4
2006E
56.9
• Despite historically high revenue growth and its large market footprint, SBSA’s margins are below average, with 2005 radio
EBITDA margin of 33% (versus the industry’s average of 40%).
2007E
1026.2 • We expect total EBITDA margins of only 20% in FY06 and limited margin expansion going forward due to the above-
average radio costs and start-up losses at its TV station.
• SBSA currently trades at 20 x 2006E EV/EBITDA, a 75% premium to its peers. With flattish margins and decelerating top2007E line growth, we believe valuation expansion will be limited over the next 12 months.
15.4
Source: Company data, Bloomberg, JPMorgan estimates, JPMorgan SaVanT. Prices as of June 15, 2006.
5
June 28, 2006
Global Equity Research
Global Gambits — The Right Moves for Right Now
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JPMorgan Global Media Team – Research
Equity Research
Frederick Searby, CFA
Global Sector
Coordinator
Credit Research
Advertising and Marketing
Americas
United States
Frederick
Searby, CFA
Jason Lowe
David Lewis
Global Entertainment Conglomerates Broadcasting
Americas
Americas
United States
John Blackledge United States John Blackledge
Aaron Chew
Aaron Chew
Barton Crockett
Barton Crockett
(Small-Mid Cap
(Small-Mid Cap
Media)
Media)
Robert Milacci
Robert Milacci
Latin America
EMEA
Pan Europe
Gareth Davies
EMEA
Pan Europe
Gareth Davies
EMEA
Pan Europe
Publishing
Americas
United States
Jean-Charles
Latin America
Lemardeley, CFA
Andre Baggio, CFA
Cesar Tiron
Elena Nikolaaeva
Mark O’Donnell
EMEA
Pan Europe
Frederick Searby,
CFA
Jason Lowe
David Lewis
Barton Crockett
(Small-Mid Cap
Media)
Robert Milacci
Americas
United States
Latin America
Jean-Charles
Lemardeley, CFA
Andre Baggio, CFA
Cesar Tiron
Elena Nikolaaeva
Craig Watson
Gareth Davies
EMEA
Pan Europe
Japan
Vineet Sharma,
CFA
Kazuyo Katsuma Australia
Vineet Sharma,
CFA
Cameron McKnight Australia
Terry Couper
CEEMEA
Asia Pacific
Asia Pacific
Pan Asia Pacific Vineet Sharma,
Australia,
New Zealand
CFA
Cameron McKnight
Cameron McKnight Australia
Terry Couper
Terry Couper
South Korea
Mingoo Kang
Hiroshi Takada
Hong Kong
Shunsuke Tsuchiya
Japan
Philippines
Singapore
Vineet Sharma,
CFA
Kazuyo Katsuma
Jeanette Yutan
Anuj Sehgal
Asia Pacific
Pan Asia Pacific
Asia Pacific
Pan Asia Pacific
Japan
Asia Pacific
Pan Asia Pacific Vineet Sharma
South Korea
Kristina Sazama (HG/HYBroadcasting / Publishing)
Kiran Rijhsinghani(HG/HYBroadcasting / Publishing)
Michael V. Pace (HG/HY-Cable
TV/DBS)
Leslie Sturgeon (HG/HY-Cable
TV/DBS)
Ying Wang (HG/HY- Cabl/Satellite,
Broadcasting/Publishing)
William W Perry
Jennifer Billings (HG/HY)
Andrew Webb (HG/HY)
Douglas Krehbiel
Allison Bellows Tiernan
Mingoo Kang
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IB clients*
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IB clients*
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40%
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35%
63%
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