Two Plays on Trilogy

12/12/2003 12:00 am EST

Focus:

The final part of the Lord of the Rings trilogy hits theaters this coming week, and we offer two stocks that have an interest in the success of that film franchise.  Bernie Schaeffer suggests looking at video game maker, Electronic Arts, while S&P’s The Outlook suggests accumulation of Time Warner, owner of New Line Cinema.

"Third quarter results at Time Warner (TWX NYSE) benefited from higher cable subscriptions, ad revenues and affiliate fees and wider margins on DVD sales. The concluding episode of The Lord of The Rings trilogy is due from Time Warner’s New Line Cinema subsidiary on December 17. New Line also produced Elf, which has done very well at the box office since its recent release. In the meantime, Time Warner is making progress using its free cash flow and sales of non-core assets to reduce debt. Our 12- month target price of $19 is based on our discounted cash flow model and an analysis of the price-to-free cash- flow multiple relative to peers. We advise accumulation of the stock for capital appreciation."

Schaeffer, Bernie"Electronic Arts (ERTS NASDAQ) remains the interactive gaming software kingpin with such hit titles as The Sims, SimCity, and Madden NFL," says Bernie Schaeffer in The Option Advisor. "The company also has licensing rights to Lord of the Rings, Harry Potter, and James Bond. In October, the firm reported earnings that smashed the Street estimate by six cents per share and boosted its fiscal 2004 outlook. What's more, the equity has outperformed the Nasdaq since March 2000. Yet investors continue to harbor doubts. ERTS has also begun to see a heavy accumulation of puts at its December 40 and 42.50 strikes, which should lend added support. In addition, short interest jumped roughly six percent over the most recent reporting period to 11.9 million shares. For options traders, we recommend buying the March 40 calls on ERTS."

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