Table 14

Blockbusters (Films Exceeding $50 Million) by Distributor

In the past several years, we have not recommended movie stocks (except MCA, due to "E.T.") because of the movie business. A high-risk position, based on an anticipated blockbuster, requires quick action and almost a trading mentality as evidenced by the rapid move of MCA when it released "E.T." in 1982. We strongly discourage investment in these stocks based on what appears to be a strong upcoming release schedule as such projections generally prove inaccurate. Over the past ten years, some release schedules expected by the industry and Wall Street to be very powerful have proven extremely disappointing, and some that looked uninspiring have proven very strong. Approaching the industry by looking at movies that have contemporary themes is of little value as comedies have been disappointing when comedies were popular, and science fiction or space action films have been disappointing when those types were in vogue. This could be said about any specific title in any general category.

Asset plays or library values have been the driving force behind most recommendations. However, if our theories about the modest positive impact of pay and tape on library values is correct, this approach is dubious. However, although we believe prices paid in the acquisitions of movie companies (especially MGM's purchase of UA) have been high, they have in fact been realized, and investors willing to play that strategy have been successful. In the following section, we discuss individual movie companies, our earnings outlook, and our investment opinion. Of the seven companies discussed, Orion and Cannon are very different from the others in that they have no libraries and investment appeal can be based only on the theatrical release schedule or financing techniques. Warner's and Disney's film businesses are subordinated to other operations, leaving MGM/UA, Home Entertainment Group, Orion Pictures, and Cannon Group as "pure plays."

Earnings of movie companies or filmed entertainment operations have been extremely volatile over the past ten years. Each of the major participants, including Twentieth Century-Fox (now private) and Columbia Pictures (now part of Coca-Cola), have shown substantial year-to-year earnings increases and decreases as a function of the quality of each year's release schedule. In an industry that could realize a 7% earnings growth rate over the next five years, this does not suggest a better-than-market multiple on earnings (setting aside asset values) unless due to particular financing techniques or a strong syndication line with a reasonably consistant earnings flow. Near term, Cannon Films has substantially reduced the

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unpredictability of its filmed entertainment earnings on the downside by aggressive preselling. Home Entertainment Group has also established reasonable earnings visibility due to the continued pipeline filling of inventories at retail rental locations. However, beyond this year, HEG's revenue flow will be increasingly dependent on the quality of MGM's theatrical release schedule and its ability to generate non-theatrical video products. Table 15 shows our estimates, and the following figure shows unweighted stock price action of the seven companies.

As of February 28, 1984, Goldman, Sachs & Co. had a long position (under $250,000 market value) in Warner Communications common stock and was short (under $250,000) warrants for Warner common. These positions may be

increased or decreased from time to time.

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