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November 26, 1997
Kushner-Locke Shareholders
May Have a Hit on Their Hands
By MARK VEVERKA
Staff Reporter of THE WALL STREET JOURNAL
At Kushner-Locke, it's the reruns that bear watching these days.
While it isn't known for highbrow fare, the 14-year-old independent television and film producer has long enjoyed a reputation as a well-run company in an industry that has had more than its fair share of flops. Indeed, the two co-chairmen who founded the Los Angeles company, Don Kushner and Peter Locke, have a proven track record of developing reliable programming on time and within budget.
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Kushner-Locke Co.
Business: Independent producer and distributor of films and television programming
Corporate headquarters: Los Angeles
Nine months (June 30) ÿÿÿÿÿÿ1997ÿÿÿÿÿ1996Revenue:$41,667,000$58,320,000Net Income:1,090,0001,416,000-aÿÿPer-share earnings:ÿÿÿÿ0.02ÿÿÿÿ0.04-aThird quarter
ÿÿPer-share earnings:
ÿÿÿÿ0.02
ÿÿÿÿ0.01-b
Trailing P/E: N.A.ÿÿÿÿÿÿÿÿÿÿDividend yield: Nil
a-Includes charge of $300,000 for repayment of debt.
b-Includes charge of $250,000 for repayment of debt.
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The company focuses mainly on low-cost television programming and films aimed at the home-video and pay-per-view markets. "Their reputation is rather conservative" compared with other independents, says analyst Larry Gerbrandt of Paul Kagan Associates, a boutique research firm in Carmel. "There are a lot of buccaneers out there."
Among Kushner-Locke's most popular fare: "The Brave Little Toaster," an animated children's feature co-produced with Hyperion Pictures, a Pasadena production company, and a series of made-for-TV movies starring Brian Dennehy as detective Jack Reed.
In the Vault
But Jeffrey Logsdon, research director at Cruttenden Roth in Irvine, says that what helps make Kushner-Locke a particularly compelling play right now is its film and TV library, which includes its own productions, plus some purchased from others. Although the company began beefing up the library in 1994, it has only recently gotten to the point that buyers -- from cable channels to local TV stations to international outlets -- are regularly tapping it for titles that are then shown as reruns.
And the archive, in turn, has started to throw off a steady stream of cash. "The library's value provides a springboard for the company to finance a broader array of production activities," says Mr. Logsdon, who rates Kushner-Locke a "strong buy" and thinks its shares could trade in the $7 to $9 range over the next 18 months. The stock currently trades at around $4.
Certainly, Kushner-Locke's modest 200-title library isn't going to threaten the likes of Ted Turner. But it does provide shareholders with something of a long-term annuity. Mr. Logsdon, who values the 1,000 hours of programming at about $65 million, says that the library has begun to generate about $10 million to $13 million a year in revenue. (He projects the company will report total revenue of at least $60 million for fiscal 1997 ended Sept. 30. Revenue was $80.2 million for fiscal 1996.)
John Miller, a top executive with a unit of Chase Manhattan Bank in Los Angeles, says the library was also an important factor in his institution's decision to boost Kushner-Locke's credit line by 50% to $60 million in September. That line of capital should also provide the company with resources to produce new shows.
And, of course, more product translates into more revenue and potential profits. Over the next three years, Mr. Logsdon predicts that Kushner-Locke's earnings will grow an average of 35% annually.
Despite the rosy outlook, there are plenty of risks. Mr. Logsdon says that the company's "greatest vulnerability" is the unsold productions that it carries on its books as assets -- which eventually must be written down if there are no buyers for them. These "film inventories" currently stand at $66.9 million.
The entertainment business is also capital-intensive and seasonal in nature. All it would take is a short losing streak, Mr. Logsdon warns, to "severely affect Kushner-Locke's ability to finance" new programming. "These guys don't have a lot of excess capital," he says. "They can't afford to be wasteful."
And while Messrs. Kushner and Locke bring years of solid experience to the business, some investors wonder if their $850,000 in combined salaries for fiscal 1996 wasn't a bit rich for a company that netted only $730,000 in profit.
There's also the issue of Kushner-Locke's low-risk philosophy. The company's product is generally aimed at reliable but narrow markets (say, Brian Dennehy fans). The strategy means more predictable returns, but also fewer really big hits. "You're never going to have a blockbuster from a made-for-TV movie," says Paul Kagan's Mr. Gerbrandt.
Nonetheless, independent producers do have a niche in Hollywood -- and at times they have returned handsome rewards to their shareholders. Mr. Logsdon says the recent $300 million acquisition of Santa Monica-based All-American Communications (the producer of "Baywatch") by London-based Pearson bodes well for companies like Kushner-Locke. All-American fetched 10.7 times cash flow -- a measure by which Kushner-Locke would be valued at nearly $9 a share.
Another thing Kushner-Locke has going for it is the way it has strengthened its control over the TV shows and movies it produces. Until a few years ago, Kushner-Locke often acted in the role of "producer for hire," turning over its productions to one of the major networks for a set fee. While this was a relatively low-risk strategy, it meant that the company missed out on most of the upside if the program was eventually resold or sent into syndication.
It was "a drag on earnings," says Mr. Locke, the co-chairman.
A Longer Reach
But that has changed. In 1995, Kushner-Locke launched its own distribution subsidiary: KLC/New City Tele-Ventures. The operation allows Kushner-Locke to negotiate directly with outlets such as cable networks. And profit margins have widened as a result. "The distribution arms were started so we could watch our projects go downstream," Mr. Locke says.
In addition, Kushner-Locke recently began venturing into films for theatrical release and turning up the volume on its TV network work. The company is currently producing "Denial," a feature film starring Jason Alexander of "Seinfeld" targeted for a 1998 release. ABC has re-signed it to produce a weekly series, "Cracker." And the company announced last week that it is teaming with filmmaker Robert Altman and "Doonesbury" cartoonist Garry Trudeau to develop a one-hour series pilot for ABC called "Killer App."
All of these moves are helping to raise the company's profile with major broadcast networks and film studios. The company currently has relationships with ABC, NBC, CBS, HBO, Showtime, Disney, Twentieth Century Fox and Universal, among others.
But it is still Kushner-Locke's economical approach that is its stock in trade.
"There's always been a market for less-expensive programming to fill around the big hits," says Mr. Gerbrandt. Kushner-Locke, he adds, is "a survivor in a business where there are mostly failures."
Sales Pop: Shares of Cost Plus soared 29% to close last week at $35 after the Oakland-based retailer announced that sales for stores open longer than a year jumped 6.2% during the third quarter.
Rumor Mill: Hambrecht & Quist shares rose about 38% to $39.375 amid reports that the San Francisco investment bank is talking to potential suitors again. The company reportedly has been in discussions with Merrill Lynch and Societe Generale. |
