Live Nation: Rockin' Out

Will you be shelling out a small fortune to see Barbara Streisand perform later this year? Maybe you prefer the mosh pits of Ozzfest, or the laid back Margaritavilles of Jimmy Buffet. OK, buying a stock doesn't provide the same kind of visceral experience that seeing a concert does -- but it'd be nice to be paid to be part of the music scene instead of the other way around, wouldn't it?

Friedman Billings Ramsey thinks stock in concert promoter Live Nation is just the ticket. The Virginia brokerage on Monday initiated coverage of Live Nation (symbol LYV) with a bullish rating, forecasting a stock price within the next 12 months of $27.50. The stock jumped $1.24, or 6.2%, on Tuesday to $21.16.

Live Nation, a spinoff from radio giant Clear Channel Communications, made its debut on the New York Stock Exchange last December at $11 a share. The Beverly Hills-based company promoted, produced or hosted more than 29,500 live entertainment events in 2005, and so far this year it has showcased such artists as Billy Joel and Coldplay -- Babs and Buffet are coming up. The company also promotes and produces theatrical performances and motorsports events, such as monster truck shows and motorcycle races.

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The stock was on the charts with a bullet until June, when the shares peaked at nearly $25, then fell back after news of a slow second quarter. This is your chance to buy in, says FBR's David Marsh, who argues that Live Nation's prospects are improving as it shapes itself as a standalone company.

As anyone with an iPod knows, it's an understatement to say that the music industry has changed a lot in the past few years. Since 2000, CD sales have fallen about 4% a year, on average, including an 8% plunge in sales last year. Of course, people are paying for digital downloads of their favorite tunes (at least most of the time). But most fans only download a song or two from each album, while a record label needs ten downloads to make up for one lost CD sale. As a result, lucrative long-term recording contracts have gone the way of Elvis -- they may be spotted occasionally, but are essentially dead.

This may be bad news for record labels, but it's great news for promoters such as Live Nation, because concert tours are becoming a major slice of an artist's income. Expect a steady trend of increased touring in coming years, with promoters increasingly offering "premium" packages -- giving fans the opportunity (for a price) to go backstage and meet the artists, for example.

Live Nation is well positioned to capitalize on the touring trend. The company owns, operates or has booking rights to 153 venues in the U.S. and Europe. Later this year Live Nation will complete a $350 million acquisition of House of Blues, adding another 18 halls. That will make Live Nation the largest venue manager in the world, with estimated 2006 revenues of $3.2 billion. The company's venues are geographically diverse, so any regional weakness will be offset. And its sites, which range from amphitheaters to arenas, clubs, theaters and festival sites, ensure access to a wide range of artists.

Live Nation is going after complementary businesses, too. The company recently acquired majority stakes in TRUNK Ltd., which sells licensed merchandise, such as iconic Grateful Dead, Beatles and Black Sabbath T-shirts that go for $90 or more, and Musictoday, which builds artists' Web sites and runs online fan clubs.

Meanwhile, Live Nation's executives -- most of whom were born after the Beatles first toured America -- are focusing on cutting costs and boosting shareholder value. The company is streamlining operations and expects to cut expenses by $20 million this year. As of July 31, the company had repurchased 3.4 million shares for $42.7 million, part of a $150 million buyback program.

The stock is not with out risks -- a lot of 'em. The entertainment industry is intensely competitive, and consumer tastes can change in a heartbeat. (Anyone remember Milli Vanilli?) Worsening economic conditions might cause concertgoers to rethink spending what can amount to several hundred dollars on a night out. And because 25% of the venues in the company's universe are overseas, revenues could get clipped by currency fluctuations.

But FBR's Marsh sees earnings of $1.01 a share next year, up from an expected 81 cents a share this year and a loss of $1.96 in 2005. Live Nation's competition includes a vast array of entertainment companies, such as Six Flags, Walt Disney and International Speedway, and looking at share price in relation to earnings before taking into account such things as interest expense, taxes, depreciation or amortization, Live Nation should command a slight premium to them, says Marsh. At Marsh's target price of $27.50, the stock would trade at ten times estimated 2007 EBITDA, versus 9.2 for the competition. Unlike its mature peers, Live Nation has the opportunity to improve profit margins as it makes the transition from part of a conglomerate to a streamlined event company.

On the other hand, you can argue that the shares are cheap -- especially when you consider that tickets for some Streisand seats are going for $750 each.