Music Biz Outpaces Surging Stock Mkt.

NEW YORK‹With the Dow Jones Industrial Average crossing the 10,000 barrier in recent weeks, the U.S. bull market rages on. But many music-related companies are outpacing the gains in the Dow and other standard measures of stock market activity. The most important reasons are improved operations, lower debt, and the Internet.
From the end of last year through April 13, the Dow rose 13.2%, while a broader measure of the market, the S&P 500 index, gained 9.8%. Meanwhile, the Nasdaq composite, which is heavily weighted with technology companies, soared 17.8%.
Although these increases are impressive for a period of less than four months, the companies owning three of the five major record companies are up far more than that since the beginning of the year. Time Warner, parent of Warner Music Group, saw its stock rise 24%, partly because of a turnaround in its music business. Sony, the Japan-based owner of Sony Music Entertainment, was up 37% after a disappointing year in 1998. And Seagram, operator of the world's largest record company, Universal Music Group, jumped 67% on Internet fever.
TECHNOLOGY RISES
These increases in turn were dwarfed by rises in technology companies that are music-related. The biggest mover of all music stocks has been RealNetworks, which markets technology for streaming audio and video online. Its shares have risen 538.2% this year to $229. Less lofty but still high-flying has been broadcast.com, which provides Webcasts of radio programming and concerts online. Its stock climbed 91.7% to $146.6875.
The biggest losers among music-related stocks have been the bricks-and-mortar retailers. They enjoyed a big runup in previous years after turning around their bankruptcy-threatened businesses. But now, analysts say, the potential for fast-growing music sales over the Internet has placed these stocks in disfavor.
Trans World Entertainment, which had been one of the market's best performers a year ago, fell the furthest, down 48.8% to $10.375. Not far behind was the nation's biggest music retailer, Musicland Stores, whose shares have dropped 40.6% this year to $9.125.
Bookstore chain Borders Books & Music, which sells a large amount of music, has slid 38.1% to $15.4375, primarily because of competition from the Internet bookseller Amazon.com. Another retailer of books and music, Hastings Entertainment, has fallen 30.3% to $9.75. Although music chain National Record Mart has dropped only 8.2% this year, to $8.375, it had not previously risen as high as its larger competitors.
The performance of the online music retailers is mixed. Segment leader Amazon.com has been one of the hottest overall stocks in recent years (last year it skyrocketed 966%), but this year its shares are up just 11% to $178.375 as investors have taken their profits. Online retailer CDnow, which added market share by merging with N2K (owner of Music Boulevard), has fallen 11.1% this year to $16. Analysts say investors are betting that Amazon.com will emerge as the dominant music-seller online.
Some retail stocks have had an extraordinary run, however‹the chains that specialize in selling consumer electronics. Best Buy was one of the hottest Big Board stocks in 1998, rising 233%. This year, after a stock split, the shares have continued their torrid pace, rising 79.8% to $55.1875.
Although Wall Street sees Best Buy as a seller of computers and appliances, the company has become one of the biggest and most powerful merchandisers of music in the U.S. Its biggest competitor, Circuit City Stores, another big music account, has risen 44.2% this year to $72.
For the major entertainment conglomerates, the results have been striking this year. Time Warner's strong performance follows a 100% rise in its stock in 1998. Its formerly sluggish music division seems to be turning around, with cash flow for the most recent quarter up nearly 10% (see story, page 6). For Sony, this year's 37.1% stock increase follows a bad year in 1998, in which shares fell 20.7%. It has seen a big improvement in its consumer electronics business.
Seagram's 67.6% rise this year has been largely due to a big spike when it recently announced it was forming a venture with another major record company, BMG (owned by privately held Germany-based Bertelsmann), to market music over the Internet. Seagram has also benefited from the sale of film assets it acquired when it bought PolyGram last year for $10.4 billion and merged the two companies' music operations.
Entertainment conglomerate Walt Disney's stock, however, has had a difficult ride in the past year. Once the industry's top performer, its shares fell 15.8% this year to $34.75 after a 9.1% drop for all of 1998. Disney has been a relatively small player in the music business but is building a larger record company.
Analyst Kathy Styponias of Prudential Securities says the biggest problem at Disney has been the decline in home video profits, a major contributor to the company's bottom line. "Its older animated classics [like "Cinderella"] have been out of the vaults once or twice now," she says.
Viacom, the entertainment giant that owns MTV, has been a strong performer. Shares are up 28.9% this year to $47.4375 after a stock split and an 80% gain last year. Analysts have cheered Viacom's steady increases in cash flow at MTV, the turnaround at Blockbuster, and the successful efforts in reducing debt.
"Many entertainment companies in general were for a long time saddled with debt from making big acquisitions," says Styponias. "Now they have enough free cash to be able to pay down their debt, so their balance sheets look better than they have in a long time."
In the independent distribution sector, the results are mixed. Handleman, a large distributor of music that racks accounts like Wal-Mart and Kmart, has inched up only 1.3% this year to $14.0625, despite those retailers' increasing share of music sales. But last year Handleman's stock doubled after the company undertook an extensive restructuring in which it exited most non-music businesses.
The biggest wholesaler of music, Valley Media, only recently made an initial public offering of stock, so it cannot be fairly compared to the other companies. But its shares have risen 28.7% since the offering to $25.75.
A strong performer among the indie distributors has been Navarre; shares were up 73.9% to $17.50. But many observers believe the gains are related more to its majority-owned NetRadio, an Internet radio network, than to traditional music distribution.
And K-tel, which has been variously tagged as a music distributor, a direct marketer of consumer products, and an online music-store operator, has struggled this year. Last year, amid Internet frenzy following the company's announcement that it was going to sell music online, the stock rose 216.9%. But financial problems led investors to bail out of the stock toward year's end. This year shares have fallen 17.2% to $8.6875.
Another direct marketer of music is Reader's Digest Assn., which sells compilation albums. Its stock has gone up 25.8% to $31.6875 this year, but that is unrelated to its music business. The company initiated a restructuring last year in order to boost the stock. Moreover, the company has said it plans to use the Internet as part of its new strategy.