Live Nation Rocks On

In the old days, musicians launched a concert tour to promote a new album. That, of course, was before the days of MP3s and free music downloads, which have essentially eroded artists' rights to their own recordings and the ability to make real money from them. Now, albums are the marketing tools of concerts, an experience that as of yet cannot be pirated. Today, artists earn 80% of their revenues from concerts and sales of associated products.

That's good news for Live Nation (symbol LYV), which was spun off from Clear Channel Communication in 2005. The largest owner and operator of live concerts -- Live Nation puts on some 26,000 events a year -- the Beverly Hills, Cal., company thrives because Americans love live entertainment. "Live Nation benefits from the difficulty of replicating the live experience that casual and passionate fans pay for in good times or bad," writes James Boyle, an analyst for CL King & Associates, a research firm.

Boyle upgraded the stock from "neutral" to "accumulate" on August 8, the day after Live Nation reported second-quarter results that blew past Wall Street estimates. The company said second-quarter revenues totaled $1.16 billion, beating the $1.05 billion that analysts, on average, had forecasted. Attendance rose 14% and spending per attendee climbed 6%. Live Nation reported earnings of 2 cents a share, trouncing the 20-cent-per-share loss that analysts had anticipated. However, profit margins on operations contracted from 3.3% to 2% due to losses in the firm's ticketing segment.

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Live Nation focuses on inking "360-deals," all-encompassing agreements with top performers for the right to release their albums, promote their tours and sell any associated merchandise. The deals are costly, but they give Live Nation a cut of the long-term revenues generated. Rapper Jay-Z managed to snag a $150-million deal over ten years, and Madonna signed a $120-million agreement for the same length of time. Live Nation has also signed up Nickelback, Shakira and U2.

Morningstar analyst Warren Miller notes that Live Nation's business model is untested. The company "started with control of the venues, then used that to spread out into other areas of the music industry, and by so doing it's competing with the record labels," he says.

Miller, like other critics -- especially those within the executive suites of the record labels -- accuse Live Nation of overpaying for talent. After all, the Material Girl turns 50 on August 16. Will she still be as big a draw when she's getting ready to collect Social Security? "If Live Nation can get to the point where it's paying on parity to what the labels are paying or even below that, then it will be a great strategy," says Miller. "But that's yet to be determined."

Live Nation's fans say the deals aren't as steep as they appear at first glance. "That's something that the investment community misses," says Miller Tabak & Co. analyst David Joyce. "Madonna is not getting paid $120 million upfront; the money is getting paid out over ten years, and that's only if she performs."

Live Nation has other revenue-generating schemes in the works. It plans to let its partnership with Ticketmaster lapse when it expires at the end of the year in the U.S. and at the end of 2009 in Europe. Instead, Live Nation will sell tickets on its own Web site and pocket the service fees. "That's another opportunity to expand profit margins," says Joyce.

The stock has been on a roll since the earnings report. At its August 15 close of $17.48, it's up almost 39% in six trading sessions and can no longer be considered cheap. One way to value media companies is to compare enterprise value (market capitalization plus debt outstanding) with earnings before interest, taxes, depreciation and amortization. Morningstar's Miller says Live Nation's EV-to-EBITDA ratio is 9.6. That compares with 6.9 for IAC/Interactive (IACI) and 6.4 for Warner Music Group (WMG).

Such a rich price might be hard to justify. Like all businesses that sell things consumers may want but don't really need, Live Nation is at the mercy of a rude economy. Will consumers really splurge on a $200 ticket to a Bruce Springsteen show if they don't have jobs and gasoline costs $4 a gallon?

Bulls say yes. "Investors are running away from consumer-discretionary stocks right now without paying attention to the fundamentals," says Joyce. "People will save all year to go to a concert in the summer."