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THE MEDIA GIANTS MAY HIT THEIR STRIDE

Good deals could include Disney and Viacom

Globalization and new technologies--hallmarks of the New Economy--are having a profound impact on media giants. That impact is both positive and negative. But most analysts believe that the recently pummeled stocks of most of the big media conglomerates are poised for a sharp recovery.

Fresh international markets for U.S.-produced content are opening up, allowing the media companies to generate billions in additional revenue simply by selling existing content to new audiences. That's what happened when Viacom Chairman Sumner M. Redstone struck a $2 billion, 10-year deal in April for Paramount's movies and TV shows to air on the KirchGroup's TV system in Germany.

And back in the U.S., novel technologies are allowing media companies to repackage and sell their content differently. Take Time Warner's Home Box Office. In 1992, before direct-broadcast satellites took off, HBO counted only 100,000 new subscribers. In 1995 and 1996, HBO logged 5.4 million new customers. About half of those are DBS subscribers who receive a special ''multiplex'' three channels of HBO.

But electronic delivery systems and media outlets don't always live up to their hype. Largely thanks to problems at its Virgin Interactive unit, Viacom Inc.'s Spelling Entertainment lost $10 million in the first nine months of the year. Despite huge startup costs, Time Warner's Full Service Network interactive-TV trial in Orlando has never been rolled out elsewhere. And the entire cable industry has been trampled as it failed to meet repeated promises that some new technological advancement--telephony, cable modems, or digital TV--would soon be widely available.

While media companies are in many cases poised to make great gains, their stocks have taken a beating as a group. Many companies are still digesting huge acquisitions made in recent years. And investors are uncertain about the lasting impact on these companies of new technologies and access to new markets overseas. Standard & Poor's broadcast/media group lost over 19.5% of its value in the year ending Dec. 16.

Analysts agree, though, that the worst is likely behind many of the media giants. Some of the companies seem poised for sharp improvements in cash flow. At the least, the downside risk seems minimal. Says State Street Research Inc.'s Larry Haverty, who oversees positions in Time Warner, Walt Disney, and News Corp.: ''You can't break your neck falling out of a basement.''

PAY DAY. What should an investor look for in these companies when placing a bet? Disregard the promise of snazzy new revenue streams and exotic technological breakthroughs. Focus instead on the best-run companies with strong earnings momentum. In fact, media may be one of the few sectors where an investor can find bargains nowadays. ''The market clearly has pockets of overvaluation in it. Media is not one of those,'' notes Haverty.

As the big media companies begin to digest their huge acquisitions of the past three years, investors may see some of the promised operational payoffs materialize by mid-1997, says Merrill Lynch & Co. media analyst Jessica Reif, who especially favors Viacom and Time Warner, where all divisions except for music have been growing at a double-digit pace. Sanford C. Bernstein & Co. media analyst Tom Wolzien likes Disney, where shares have taken a hit because of ratings problems at its recently acquired ABC television network. Networks are cyclical, and meanwhile, Disney's other assets continue to perform well. ''Disney is the long-term investment'' to make, says Wolzien. ''It has been and will continue to be the most solid of the companies. It is probably the highest-quality stock in the group.''

While media conglomerates are positioning themselves to take advantage of the promise of the New Economy, investors who keep their attention trained on the less alluring basics of these companies' businesses will fare better in the year to come.

By Elizabeth Lesly in New York



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