Competition Amongst Content Providers will Boost Content Owners

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Television content providers are in a tailspin after Netflix (NASDAQ: NFLX) and other entrants bridged media delivered via the internet, broadcast, cable, and DVD storage.

At this point, there seems to be a lot of competition between media providers, which may be to the benefit of the producers and owners of content. Amid such competition between formats, companies, and viewing experiences, investors must demand low valuations from viewing platforms. They should be more forgiving and willing to accept higher valuations for studios and other companies that can license content to a growing number of platforms.

Content is King

AMC Networks (NASDAQ: AMCX), the company behind the highly rated show, “The Walking Dead” and the award winning series “Mad Men,” posted a 17% increase in revenue from licensing shows to digital services like Netflix, and a 9.1% hike in advertising sales. Third quarter earnings reached $332.1 million, beating average analysts’ estimates of $287.4 million.

In contrast, operating cash flow declined by 11% to $110 million, affected by an increase in litigation expenses due to a dispute with Dish Network (NASDAQ: DISH) and lack of affiliate revenue. Dish refused to carry AMC’s four cable networks, AMC, IFC, Sundance Channel, and WE TV, due to low ratings. AMC, however, claimed Dish had pulled them in retaliation to a breach of contract lawsuit filed in 2008. Last month, Dish eventually settled the lawsuit, paying $700 million to AMC and Cablevision Systems and agreeing to carry the networks again. AMC was spun off from Cablevision in June of 2011.

Meanwhile, Disney (NYSE: DIS) sales rose 3.4% to $10.8 billion, below analysts’ average estimate of $10.9 billion, due to a decline in ad-sales at ABC and weakening trends at ESPN network. ESPN, the leading sports network, supplies 75% of Disney’s cable network operating income. Although ESPN’s advertising changed little, programming costs are on the rise, amidst competition from other sports channels like the NFL Network. Wedge Partners senior equity analyst Martin Pyykkonen said, “Ad sales didn’t really rebound after the Olympics ended. ESPN is still an incredibly powerful brand, but maybe it’s kind of peaked.”  The company’s film unit posted declines in revenue and operating income on write-downs and lower ticket sales. Marketing and programming costs at subsidiary and Comcast decreased broadcast profit by 4.5% to $192 million.

As part of CEO Robert Iger’s pursuit of memorable and valuable “characters,” Disney acquired “Star Wars” owner Lucas Films for $4.05 billion on Oct. 30. In 2006, Disney purchased “Toy Story” creator Pixar Animation Studios for $7 billion, and in 2009 it paid $4.2 billion for Marvel Entertainment, the creator of the “The Avengers.” Despite the small increase in sales, which edged 3.4% to $42.3 billion, net profit for the full fiscal year jumped 18% to $5.68 billion. Expected revenues of $500 million coming from new attractions and other park enhancements in Anaheim, California will be offset by theme parks investments in Orlando, Florida and Shanghai this fiscal year.

In anticipation of a possible tax increase next year, Disney declared cash dividends of $0.75 per share, payable on Dec. 28 to shareholders on record as of Dec. 10. The cash dividend represents a 25% increase from last year’s annual dividend of $0.60 per share paid to applicable investors this January.  Analysts have been predicting $0.70 per share dividend from Disney. In spite of the increase, Disney’s yield of 1.5% is still below the Standard & Poor’s 500 Index’s average of 2.2%. Brown Advisory’s portfolio manager Michael Foss said, “They still have room to move that dividend up over time, even with all their growth initiatives.”

It’s not all roses for content companies. Time Warner Cable (NYSE: TWC) reported lower earnings in the third quarter as a result of losing over 100,000 video subscribers. The firm also has fewer voice and internet clients than had previously been forecasted by analysts. Sales grew to $5.36 billion but missed the average of analyst estimates.

Valuation Check

Investors should jump on low valuations for content providers. Viacom is trading at a discount relative to its peers’ earnings multiples:

<table> <tbody> <tr> <td> <p><span>Ticker</span></p> </td> <td> <p><span>Company</span></p> </td> <td> <p><span>P/E</span></p> </td> <td> <p><span>P/S</span></p> </td> <td> <p><span>P/B</span></p> </td> <td> <p><span>P/FCF</span></p> </td> <td> <p><span>D/E</span></p> </td> <td> <p><span>EPS Growth Next 5 Years</span></p> </td> </tr> <tr> <td> <p><span>VIAB</span></p> </td> <td> <p><span>Viacom</span></p> </td> <td> <p><span>12.39</span></p> </td> <td> <p><span>1.96</span></p> </td> <td> <p><span>3.69</span></p> </td> <td> <p><span>15.19</span></p> </td> <td> <p><span>1.09</span></p> </td> <td> <p><span>14.6%</span></p> </td> </tr> <tr> <td> <p><span>CBS</span></p> </td> <td> <p><span>CBS</span></p> </td> <td> <p><span>15.56</span></p> </td> <td> <p><span>1.57</span></p> </td> <td> <p><span>2.24</span></p> </td> <td> <p><span>22.52</span></p> </td> <td> <p><span>0.58</span></p> </td> <td> <p><span>14.0%</span></p> </td> </tr> <tr> <td> <p><span>DIS</span></p> </td> <td> <p><span>Walt Disney</span></p> </td> <td> <p><span>15.86</span></p> </td> <td> <p><span>2.08</span></p> </td> <td> <p><span>2.25</span></p> </td> <td> <p><span>21.03</span></p> </td> <td> <p><span>0.36</span></p> </td> <td> <p><span>12.6%</span></p> </td> </tr> <tr> <td> <p><span>DISC</span></p> </td> <td> <p><span>Discovery</span></p> </td> <td> <p><span>15.86</span></p> </td> <td> <p><span>2.08</span></p> </td> <td> <p><span>2.25</span></p> </td> <td> <p><span>21.03</span></p> </td> <td> <p><span>0.36</span></p> </td> <td> <p><span>12.6%</span></p> </td> </tr> <tr> <td> <p><span>CMCSA</span></p> </td> <td> <p><span>Comcast</span></p> </td> <td> <p><span>17.09</span></p> </td> <td> <p><span>1.61</span></p> </td> <td> <p><span>2.03</span></p> </td> <td> <p><span>13.66</span></p> </td> <td> <p><span>0.79</span></p> </td> <td> <p><span>15.6%</span></p> </td> </tr> <tr> <td> <p><span>TWX</span></p> </td> <td> <p><span>Time Warner</span></p> </td> <td> <p><span>17.9</span></p> </td> <td> <p><span>1.56</span></p> </td> <td> <p><span>1.5</span></p> </td> <td> <p><span>23.66</span></p> </td> <td> <p><span>0.66</span></p> </td> <td> <p><span>12.0%</span></p> </td> </tr> <tr> <td> <p><span>TV</span></p> </td> <td> <p><span>Grupo Televisa</span></p> </td> <td> <p><span>24.89</span></p> </td> <td> <p><span>2.75</span></p> </td> <td> <p><span>3.28</span></p> </td> <td> <p><span>13.37</span></p> </td> <td> <p><span>0.93</span></p> </td> <td> <p><span>13.9%</span></p> </td> </tr> <tr> <td> <p><span>AMCX</span></p> </td> <td> <p><span>AMC Networks</span></p> </td> <td> <p><span>25.13</span></p> </td> <td> <p><span>2.83</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>14.67</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>19.5%</span></p> </td> </tr> </tbody> </table>

Coinstar is trading at a discount compared to other firms that provide a platform to distribute media:

<table> <tbody> <tr> <td> <p><span>Ticker</span></p> </td> <td> <p><span>Company</span></p> </td> <td> <p><span>P/E</span></p> </td> <td> <p><span>P/S</span></p> </td> <td> <p><span>P/B</span></p> </td> <td> <p><span>P/FCF</span></p> </td> <td> <p><span>D/E</span></p> </td> <td> <p><span>EPS Growth Next 5 Years</span></p> </td> </tr> <tr> <td> <p><span>CSTR</span></p> </td> <td> <p><span>Coinstar</span></p> </td> <td> <p><span>10.63</span></p> </td> <td> <p><span>0.73</span></p> </td> <td> <p><span>2.6</span></p> </td> <td> <p><span>5.62</span></p> </td> <td> <p><span>0.66</span></p> </td> <td> <p><span>16.9%</span></p> </td> </tr> <tr> <td> <p><span>DTV</span></p> </td> <td> <p><span>DIRECTV</span></p> </td> <td> <p><span>12.35</span></p> </td> <td> <p><span>1.04</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>12.34</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>15.2%</span></p> </td> </tr> <tr> <td> <p><span>SJR</span></p> </td> <td> <p><span>Shaw Communications</span></p> </td> <td> <p><span>13.72</span></p> </td> <td> <p><span>1.98</span></p> </td> <td> <p><span>2.65</span></p> </td> <td> <p><span>1235.58</span></p> </td> <td> <p><span>1.4</span></p> </td> <td> <p><span>5.1%</span></p> </td> </tr> <tr> <td> <p><span>CMCSA</span></p> </td> <td> <p><span>Comcast</span></p> </td> <td> <p><span>17.09</span></p> </td> <td> <p><span>1.61</span></p> </td> <td> <p><span>2.03</span></p> </td> <td> <p><span>13.66</span></p> </td> <td> <p><span>0.79</span></p> </td> <td> <p><span>15.6%</span></p> </td> </tr> <tr> <td> <p><span>DISH</span></p> </td> <td> <p><span>Dish Network</span></p> </td> <td> <p><span>22.22</span></p> </td> <td> <p><span>1.16</span></p> </td> <td> <p><span>152.79</span></p> </td> <td> <p><span>9.46</span></p> </td> <td> <p><span>95.18</span></p> </td> <td> <p><span>2.4%</span></p> </td> </tr> <tr> <td> <p><span>NFLX</span></p> </td> <td> <p><span>Netflix</span></p> </td> <td> <p><span>114.85</span></p> </td> <td> <p><span>1.42</span></p> </td> <td> <p><span>7.03</span></p> </td> <td> <p><span>276.93</span></p> </td> <td> <p><span>0.56</span></p> </td> <td> <p><span>23.2%</span></p> </td> </tr> <tr> <td> <p><span>AMZN</span></p> </td> <td> <p><span>Amazon</span></p> </td> <td> <p><span>3596.57</span></p> </td> <td> <p><span>1.99</span></p> </td> <td> <p><span>15.1</span></p> </td> <td> <p><span>107.68</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>31.2%</span></p> </td> </tr> </tbody> </table>

Comcast appears on both lists because it provides hook ups for consumers. At the same time, it owns Telemundo and NBC.


Demand lower valuations among platform providers than you would for the owners that license content. At current low valuations Coinstar is sufficiently cheap to warrant speculation on a platform provider. Viacom is cheap and should be considered as a buy candidate among its content peers.

BillEdson11 has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney and Netflix. Motley Fool newsletter services recommend Walt Disney and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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