Down but Not Out : Analysts Are Optimistic Despite Drop in Live Entertainment’s Stock

A year ago, Live Entertainment Inc. in Van Nuys hired a new chairman, Wayne Patterson, the respected former chairman of Pace Membership Warehouse Inc. Patterson was brought in to help Live, a video and recorded music marketing, distribution and retail concern, recover and continue growing after the slaying of its former chairman, Jose Menendez, who was shot with his wife in August, 1989, in their Beverly Hills home.

The appointment of Patterson seemed to do the trick.

Propelled largely by the video release of the hit movie “Teenage Mutant Ninja Turtles,” Live was on its way to a record profit of $25.5 million for 1990, up 32% from 1989, and a 70% gain in revenue to $742.5 million. Its stock--which had plunged to $12.75 a share after trading as high as $25 before Menendez’s death--once again reached $25.

But that was a year ago.

Now Live’s stock is back in the basement, closing Friday at $10.75. This time around, the reason is more mundane: Investors appear to be shying away from Live because its earnings growth has stalled. Nonetheless, most analysts who follow Live are upbeat about the company’s long-term prospects.

Live’s stock traded as low as $9.50 a share late last year, when investors feared that a recession would hurt the company’s retail business, said analyst Jeffrey Logsdon at Seidler Amdec Securities Inc. in Los Angeles.

The stock began to recover early this year, but received another blow a few weeks ago when analyst Emanuel Gerard at the investment firm Gerard Klauer Mattison & Co. in New York lowered his rating on Live, saying he expected flat earnings in 1991, and recommended investors sell the stock. The same day, Live’s stock tumbled $1.625 to $11.125.

A few days later, Standard & Poor’s lowered its rating on $110 million of Live’s junk bonds and placed the debt on its “CreditWatch,” signaling that S&P; is mulling whether an additional rating change is necessary.

S&P; said its initial downgrade was based on a Live subsidiary’s inability to meet certain financial requirements of its bank agreement, and on concerns about the recession, lack of hit music releases and soft retail sales.

The same day S&P; reported its action, Live said its earnings for the first quarter ended March 31 edged down to $1.79 million from $1.82 million a year earlier, while revenue rose 9% to $161.4 million.

Live acknowledged that “weak economic conditions in the retail sector” and “competitive pressures” held profits down.

Despite the bad news, Lisbeth Barron, an analyst at the brokerage S.G. Warburg & Co. in New York, called Gerard’s lowered estimate for Live “very surprising,” adding that “nothing has changed between a month ago and when he changed his rating.”

Analyst Keith Benjamin at Burnham Securities Inc. in New York said: “I don’t disagree that short term, earnings and the stock could languish. But that shouldn’t diminish the long-term view which is relatively positive.”

Both Barron and Benjamin expect a 7% increase in Live’s earnings for all of 1991.

Live is divided into three units: its home-video division, which acquires the rights from independent production companies to release feature films on video; Lieberman Enterprises, a distributor of videos, recorded music and personal computer software to mass merchants; and its 144-store retail division, which includes the Strawberries and Waxie Maxie music and video chains in the East.

But, while the Lieberman and retail divisions have been sagging because of weak retail sales and the lack of major music releases, the home-video business--Live’s largest segment, with about half of its total revenue--remains strong.

Theodore Bean, Live’s executive vice president and chief financial officer, said continued softness in the retail sector is worrisome for the company as a whole because “obviously all our products ultimately go through to the consumer and retail markets.”

But, Bean said, “I don’t see it having a serious impact on our profitability.”

Last year, Live’s home-video division made a killing with “Teenage Mutant Ninja Turtles.” While that success is unlikely to be repeated with another single video release, Live has practically cornered the market on buying video rights from independent producers.

Among Live’s upcoming video releases is Madonna’s current theatrical release “Truth or Dare.”

Live also has an ace card in Carolco Pictures Inc., which owns 47% of Live’s common stock outstanding, thus assuring Live of a steady stream of movies.

Carolco’s films include “Total Recall,” last year’s Arnold Schwarzenegger hit, and its 1991 movies include “Terminator II,” also with Schwarzenegger; “L.A. Story” with Steve Martin, and Oliver Stone’s “The Doors.”

Analysts also credit Live with a couple of shrewd acquisitions that are expected to bolster its video business.

One is the purchase a year ago of 81% of VCL Communications, a German home-video company, in a complex arrangement that called for Live to pay a small amount of cash and to kick in additional operating funds for VCL over time.

Barron said VCL has already contributed more than $5 million to Live’s earnings and that the amount would probably increase as VCL’s library of video titles is released.

Live is also purchasing the video rights to more than 1,000 films from Vestron Inc., which was the largest independent home-video company before it filed for bankruptcy protection last November after a disastrous attempt at producing its own movies.

The acquisition, expected to close in late June, is for $27 million in cash and stock, but the price may go higher based on future revenues from the Vestron assets.

Despite the favorable report card from most of them, analysts say Live still has some weak spots.

For one thing, Live’s success remains tied to the ability of independent production companies such as Carolco to churn out popular films.

“The real challenge is on the movie-making side,” said Tom Adams, an analyst at Paul Kagan Associates, a Carmel-based entertainment research and consulting firm.

Also, Lieberman’s long-term prospects are threatened by the possibility that mass merchants will buy videos directly from movie studios.

Wal-Mart, a big Lieberman customer, tested buying “Pretty Woman” directly from Walt Disney Co. and also recently acquired a competitor of Lieberman’s.

Bean said Wal-Mart so far has made no moves to cut off Lieberman as a supplier, but he acknowledged that it’s a “potential threat.”

Logsdon said a “wild card” for Live is its joint venture with Sears, Roebuck & Co.

Live has opened 30 “Stars” video and music outlets in Sears department stores and plans to open more.

So far, said Logsdon, those outlets “are doing very, very well.”

Live Entertainment Inc. at a Glance

Live Entertainment Inc. is a Van Nuys-based home video and recorded music distributor and retailer. Its biggest and most successful division acquires the video rights to feature films such as “Teenage Mutant Ninja Turtles.” It’s also one of only a few companies not owned by a major studio that distributes videos and recorded music, and it owns 144 video and music retail stores. Carolco Pictures Inc. owns a 47% voting interest in Live. Sales Net Income * Three months ended March 31.