Miller Tabak + Co., LLC - Client Services - Media Industry Strategic Analysis

LONG-TERM TREND: CONTENT IS KING, BUT DISTRIBUTION COMPANIES COULD ALSO PROVIDE INVESTMENT OPPORTUNITY

Over the course of the past few years, a primary theme within the Cable, Media, Entertainment, and Broadcasting industry has been the debate of whether Content or Distribution is King. MT's opinion is that Content is clearly King, provided specific entertainment or informational value is in demand. The relatively constrained supply of content can now be monetized on an expanding array of distribution platforms due to recent technological developments - new consumer products such as video iPods and cell phones; carriage by the telco's fiber operating systems (FiOS) and internet protocol television (IPTV); and web-based video streaming. MT applies this overarching theme to our top-down and bottom-up combination approach to investment recommendations.

While we are in favor of the long-term trend that Content is King, we recognize that investors, at times, can overbuy Content companies and can oversell Distribution companies, thereby creating opportunities for our clients to take advantage of these price discrepancies. For example, in the past, we have looked at stand-alone film studio companies as stocks to buy in advance of a sentiment run-up ahead of their box office releases. In the event that over-hyped films appear to create too high a valuation, we might then recommend a sale. Likewise, occasional headline risk from potential new competitors can cause pressure on trading multiples of sectors or companies we follow, despite strong long-term fundamentals such as entrenched market position, free cash flow, and greater potential EBITDA growth than might be discounted in the stock prices.

MT believes that the evolution of business models in the broadly-defined media industry are starting to factor in new consumer usage patterns, thereby causing much confusion, consternation, and multiple compression for companies in this sector. MT attempts to analyze those business models to help institutional clients chose companies with the best futures. If prospects appear less robust, those companies are singled out as sales.

In addition, because many media companies tend to have multiple share class structures, an extra level of caution and valuation adjustment is part of our analysis. MT tries to identify asset values that may be hidden by non-fundamental factors. For example, some media companies' controlling shareholders may enact changes in strategy or financing causing a lack of visibility or discipline, which in turn results in stocks trading down to significant discounts to their net asset values. Such disparities in voting power versus equity ownership can cause conflicts of interest between short-term and long-term strategic positioning, operational performance, and financial returns.

Miller Tabak + Co., LLC's Strategic Analysis of the Media Industry focuses on companies with the best growth characteristics compared to their competitors. If these companies have complex business models or pending corporate actions, MT looks for valuation mispricing opportunities.

MT selects stocks that trade at discounts or close to parity on an EBITDA version of the PE/G ratio - we divide the forward Enterprise Value/EBITDA multiple by our estimate of the 5-year EBITDA CAGR. We also tend to rely on our Discounted Cash Flow valuation sensitivities as bases for our price targets.

Out of an almost 100-stock media universe, MT is flexible in our investment opinions, positive or negative, with near or long-term horizons, from either the value or the growth perspective, all based on our analytical strategic framework. We focus our favorable opinions on growth subsectors, such as the Spanish-language media companies versus the general broadcasting market, and on complex situations where investors tend to not have the opportunity to perform the analytics required to fully understand the business models and assets. We also attempt to be early to provide earnings modeling and investment and trading opinions on corporate spinoffs and IPOs.

David C. Joyce, CFA, has 12 years of experience in equity research and investment banking. Since early 2000, he has been a Senior Equity Analyst covering the Media industry at JBHanauer & Co. and at Guzman & Co., and is best known for his coverage of the Spanish-language broadcasters and the international cable companies. Mr. Joyce placed third in the 2004 Wall Street Journal "Best On The Street" Award based on his 2003 stock-picking performance. In addition, he garnered recurring recognition for earnings estimate accuracy for a range of small-, mid-, and large-capitalization media, entertainment, broadcasting, and cable stocks. Mr. Joyce's career commenced at Salomon Brothers Inc.'s investment banking division, and he was an Associate Analyst in Bear, Stearns & Co.'s equity research department.