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AOL and Liberty: Tops in Media


Schering-Plough (SGP) is looking puny: Its stock is one of the big losers among pharmaceuticals--down 33% this year. That has sparked speculation that Schering might become buyout bait. Rumors swirled when shares tumbled to 37, down from 56 in mid-February, after Schering disclosed that the Food & Drug Administration was looking into quality-control problems at its New Jersey and Puerto Rico plants.

CEO Richard Kogan insists Schering isn't for sale. But whispers persist: Drug giant Merck (MRK), said to have talked to Schering about a buyout in mid-1999 and gotten a rebuff, approached Schering again after the FDA problems emerged, says an investment banker close to the industry. Schering has again turned Merck down, says this pro. But Merck isn't giving up: The banker says Merck has proposed a buyout price in stock of 65 a share, or $91 billion in total. He sees Schering ultimately coming around. Merck has a market cap of $176 billion, vs. Schering's $55 billion. Already, Merck and Schering have joint ventures in developing certain respiratory and cholesterol-reduction drugs.

Analyst Steven Tighe of Merrill Lynch figures Schering could be worth $42 to $72 a share, depending on whether the buyer is a financial group or a drugmaker. The price will vary, he says, depending on the buyer's revenues and Schering's earnings from 2001 to 2003. Tighe says a drug company could save a lot in buying Schering because it could cut costs on operations overlap. Such synergy, he says, could range from 3% to 8% of their combined sales. But both Schering and Merck declined comment as a matter of policy. With consumer spending dragging, retailers are finding it tough to meet Wall Street's expectations. But Children's Place Retail Stores (PLCE), which sells private-label clothes for kids, may pull a surprise: Although it had guided analysts on Apr. 12 to trim first-quarter earnings estimates from 44 cents a share to 38 cents, management will probably post 48 cents, even though the consensus estimate is 38 cents. One reason: April sales exceeded estimates by a lot.

"The company has been expanding aggressively and has broad appeal" in the $22 billion children's apparel market, says Larry Leeds Jr., chairman of Buckingham Capital Management. Its high-quality, fashionably styled kids' wear--priced way below rivals'--has made Children's a big winner, he adds. Based on its growth, "the stock should double during the next two to three years," says Leeds. The stock is cheap--trading at 24, or 12 times 2001 consensus estimate of $1.80, he notes.

CEO Ezra Dabah, who says Children's Place earnings have grown at a compounded annual growth rate of 77% in the past three years, expects to beat the 2001 consensus estimate. One brokerage analyst foresees earnings of $1.93 a share in 2001 and $2.43 in 2002. The company has twice as many stores as it did two years ago: 437 outlets in 43 cities. This year, 120 new stores will be added. Merrill Lynch's Jessica Reif Cohen, the Street's media and entertainment maven, doesn't pull her punches when it comes to "sell" ratings: Disney (DIS), News Corp. (NWS), Fox (FOX), Univision (UVN), and Cablevision (CVC) all got dented when she socked it to them last year. "They were trading at high multiples but, with the economy slipping, I saw that consumer and advertising support wouldn't be there," she says. Reif Cohen, who has been covering media and entertainment for 18 years, pays close attention to quality of management, growth, asset value, and cash flow.

Now, Reif Cohen has reversed course and has turned bullish. Among her current top buys: AOL Time Warner (AOL) and Liberty Media Group (LMG.A). AOL delivered robust results during "one of the toughest operating environments in years," notes Reif Cohen. AOL is in a good spot in this weak advertising market, she says, since only 25% of its revenues come from ad revenues. Cost-cutting and leveraging AOL's infrastructure will keep driving growth at AOL, she adds. Her 12-month target for the stock, now at 52, is 65. She sees earnings of $1.25 a share in 2001 and $1.60 in 2002.

Liberty, another media, entertainment, and communications company, is also well positioned to weather the storm with its diversified assets, says Reif Cohen. Its core businesses, she notes, such as Starz Encore Group and Discovery Communications, continue to bring solid results--with cost-cutting offsetting the weak ad revenues. Her 12-month target is 20 based on a sum-of-the-parts valuation. Over the next 18 to 24 months, Reif Cohen sees the stock zipping up to 25 to 30. The stock is now 16.85.


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