Television Content: Flipping Through Valuations For Great Buys

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Television has been and will be in turmoil for years as Netflix (NASDAQ: NFLX) and other entrants bridge media provided via broadcast, the internet, cable, and DVD storage formats.

Amid such competition between formats, companies, and viewing experiences, investors must demand low valuations from stock investments.

Time Warner’s Reports Lower Cable Earnings and Lost Viewers

Time Warner Cable (NYSE: TWC), a leader in U.S. cable television, reported lower earnings in the third quarter. Shares fell 6.4 percent on this bad news. Time Warner Cable was also the biggest decline in the Standard & Poor’s 500 for that trading session.

The decrease comes as a result of Time Warner Cable losing over 100,000 video subscribers, and with final numbers going beyond the estimates of some analysts. The company also has fewer internet and voice clients than had previously been projected by analysts, a sign that Time Warner Cable still does not have the right bundles for its market share.

Sales went up to $5.36 billion, but missed the average of analyst estimates.

While Hurricane Sandy damaged the East Coast of the U.S. in early November, Time Warner Cable promised to credit customers for lost service and downtimes due to Sandy.

Good Comcast Results

Not all news from television media companies has been bad. Comcast (NASDAQ: CMCSA) beat its third quarter expectations, posting much higher revenues and earnings per share than forecasted. The earnings per share rose by 39 percent while revenues were just shy of $17 billion, topping analysts’ revenue predictions of $16 billion.  In response to the published results, Comcast’s shares went up.

In addition to increased broadband clients and fewer losses in video clientele, political advertising contributed to increased profits as it prompted an increase in cable business.  Comcast’s chairman and Chief Executive Officer, Brian Roberts, indicated that this success came hand in hand with better quality services. The impressive third quarter results were also partly attributed to NBC Universal, the media company in which Comcast has a 51 percent controlling interest. The recent London Summer Olympics boosted NBC Universal’s revenue, which went up to about $7 billion. According to Roberts, "NBCU's results highlight the strong performance of the Olympics and steady progress in its businesses as we invest to build value.”

Comcast’s gains also resulted from the sale of a $3 billion stake in the A&E cable channel and the sale of a spectrum to Verizon Wireless, a company jointly owned by Vodafone and Verizon Communications.

Flipping Through Valuations

Investors should require low valuations for television media companies enjoying good news and even lower valuations competitor stocks suffering bad news.

On the contrary, unfathomable valuations are implied by Amazon (NASDAQ: AMZN) at market prices of $226 a share. Sure, the firm's 1.79 price-to-sales ratio is in line with today's prevailing market multiples. However, Amazon’s shares are trading at an unfathomable high 2,694.17 price-to-earnings ratio. The 13.58 price-to-book multiple is also phenomenally higher than the 2.07 S&P 500 price-to-book ratio. Investors should stay away at these multiples.

The valuations implied by Netflix market prices of $78 are also really high. The recent jump in this firm’s value has been caused by the entry of activist investor Carl Icahn. This run-up is a little premature, and investors should expect business as usual when considering the firm’s operations. The firm's 1.22 price-to-sales ratio is in line with today's prevailing market multiples. Netflix shares are trading at an indefensibly high 98.61 price-to-earnings ratio. The 6.04 price-to-book multiple of this stock is higher than the 2.07 S&P 500 price-to-book ratio.

Shares of Liberty Media (NASDAQ: STRZA) are not trading low enough at $106 to compensate investors for the risks. Investors can buy more revenues per dollar from the S&P 500 since this index has a price-to-sales ratio of 1.32 while this stock has a much higher 5.09 ratio. Liberty Capital Group shares currently trade at a high 18.8 price-to-earnings ratio, a higher value than the 14.23 average of the S&P 500 index. Shares trade at a 2.38 price-to-book ratio which is near the 2.07 S&P 500 average.

Time Warner stock is trading around $45 per share. The firm's 1.46 price-to-sales ratio is in line with today's prevailing market multiples. Its 17.45 price-to-earnings ratio is a little high and its 1.44 price-to-book multiple is a little cheap. At its current market price, Time Warner is fairly valued and provides no valuation incentive to invest.

Investors should not take much solace in the firm’s dividend either. Sure, the 2.33% dividend yield is stable based on a 0.38 payout ratio. However, this does not constitute a cheap valuation. The hurdle of cheap valuation has not been met.

The current market prices for CBS (CBS) are fairly priced based on valuation at $35 per share. The firm's 1.53 price-to-sales ratio, 15.71 price-to-earnings ratio, and 2.21 price-to-book ratio are near the 2.07 S&P 500 average. At no discount to market valuations there is no reason for investors to get involved.

Investors could find value in Coinstar (CSTR) by buying shares at $47. When compared to the 1.32 price-to-sales ratio of the S&P 500, the 0.65 ratio of this stock is very attractive. Coinstar shares are valued at a compelling 9.51 price-to-earnings ratio. Shares trade at a 2.33 price-to-book ratio which is near market averages. Overall the stock is a value and the only one considered here worth buying as a speculative bet.

Conclusion

If you want to play television content as an investment strategy you should consider shares of Coinstar as a speculative bet. Other stocks on this list could also be worth considering if their valuations fall. Do not speculate on firms with fair or high valuations in an industry where the future is so unclear.

Interested in Additional Analysis?

The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep pocketed, rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These kinds of issues are a must know for investors, which is why The Motley Fool released a brand new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to both buy and sell the stock. They’re also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.


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