Part 2: What Will '07 Bring for Key Sectors?

S&P Ratings sizes up prospects for industry groups in the coming year. Part 2 includes a look at media & entertainment, oil & gas, and retailers

From Standard & Poor's RatingsDirect

Here is the second of a two-part look at Standard & Poor's Ratings Services' outlook for 2007 for more than a dozen industries, ranging from chemicals and high tech to media and retailing. (Read the first part.)

Hotel & Gaming: Growth Will Moderate

Standard & Poor's expects solid lodging industry performance again in 2007, with revenue per available room (RevPAR) in the U.S. likely to grow in the mid-single-digits. S&P does, however, expect a decline in the rate of RevPAR growth from about 8% in each of the last three years. With still-record-high occupancy levels across all price segments, pricing power in the industry remains strong, mitigating any concern about a meaningful slowdown in 2007. Given prospects for continued strength in global lodging markets, Standard & Poor's would expect an upward bias again in 2007 for ratings, in the absence of debt-financed acquisitions, including those that take companies private.

For the U.S. gaming industry, S&P expects revenue growth to moderate further in 2007, reflecting a continued gradual slowing of the U.S. economy. Despite an anticipated modest decline in consumer discretionary spending, industry revenues are still expected to expand overall. From a ratings perspective, S&P does not expect overall credit quality in the sector to materially deteriorate in coming periods despite aggressive expansion plans by many industry participants. However S&P lowered the rating on Harrah's Entertainment (HET) to below investment grade on the news that it received an offer to be acquired by private equity investors.

Still, with most companies in the gaming industry carrying stable or positive outlooks, any weakness in credit quality will most likely be reflected by outlook revisions rather than rating changes. Further debt-funded transactions, however, could prompt more downgrades.

Media & Entertainment: Poised for a Slowdown in Ad Growth

Traditional U.S. media companies look set to face a tough 2007 in light of slowing advertising growth, shifting technology, and, for some sectors, a customer base that may seek alternative sources of entertainment. Standard & Poor's expects just modest growth in traditional advertising in 2007—a year without elections or Olympics. S&P expects that the areas with the most meaningful gains in 2006 will be Hispanic TV, outdoor advertising, and cable networks—separate from the election-driven gains in local TV and cable system advertising.

The shift into online advertising spending from newspapers, radio, and TV will continue to drive cost restructuring and asset sales in traditional media. S&P forecasts slower ad spending growth next year, based on our expectation for below-trend economic expansion due to disappointing job gains, negative consumer savings, and slower activity in the housing market.

On top of concerns about decelerating ad growth, newspapers face increases in operating costs, and the trend in credit quality continues to be negative. Similarly, the magazine sector, in addition to being confronted by competition from the Internet and discount-priced startups, may see a further increase in postage rates in 2007 after absorbing this year's 5.6% jump.

Meanwhile, movie producers and theaters face numerous uncertainties. DVD sales growth is slowing for the former, and hopes that the high-definition home video format would help are being overshadowed by continued competition among two hardware formats, while the revenue opportunity of movie downloading gadgets and services may be a medium-term prospect. Theaters may be vulnerable to shortening "dark" periods before DVD release, consumers' fascination with plasma and high-definition TVs, and the growing array of Internet- and mobile-based games and diversions.