Uncertainty Weighs Heavily On Streaming Investors

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

There are some really amazing developments unfolding in television and movie distribution. Streaming services are becoming more relevant and are starting to be used for first-run content.

Though this is very exciting for consumers and employees in the entertainment industry, this is not good news for investors. This is a source of uncertainty and not assurance that investments will earn returns in the future. Investors should demand cheap valuations on stock in order to brave the risks of a changing industry.

Streaming & TV results

Many firms are doing quite well. Lions Gate Entertainment (NYSE: LGF) reported its quarterly profit above the analysts’ estimates on sales of tickets for Twilight and enhanced international results. The company’s net income for the fiscal third quarter ending in December 2012 was $37.8 million or 27 cents per share as compared to loss of $1.4 million or 1 cent per year, a year earlier. The company’s sales increased more than double to $743.6 million, above the analyst’s estimates of $719.5 million. The profit was also above the 24 cent average compiled by nine analysts from Bloomberg. The company said that the results were positive due to increased home-video sales of The Hunger Games and better terms offered by distributors who acquired the rights to release Twilight outside Canada and the United States.

 The results focused on the advantages of the company’s 2012 acquisition of Summit Entertainment which provided the company access to the Twilight series and Sinister. According to researcher Box Office Mojo, $828.3 million was generated worldwide through ticket sales of “The Twilight Saga: Breaking Dawn - Part 2.” The film would be released on home video comprising of on-demand television and DVD. During the quarter, Summit’s “Sinister” was one of the box-office winners which made for $3 million. According to Box Office Mojo, it generated $77.7 million worldwide. The company acquired Summit for $412.5 million; some part of it was financed with the target company’s cash plus assumed debt. The two top executives of Summit, Rob Friedman and Patrick Wachsberger, were appointed to lead the company’s film division.

According to Jon Feltheimer, the Chief Executive Officer of the company, the acquisition of Summit increased the company’s profit margins more than the expected. He also said that the company will utilize its free cash flow for continuous de-levering. Lions is looking for promotional partners for Divergent which would commence filming in April. He said, “We’ll be rolling out a series of announcements in the coming months.”

Other firms are disappointing analysts. Coinstar (NASDAQ: OUTR) forecasted its current-quarter results below its analysts’ estimates due to a slower movie release schedule. During the first quarter of 2013, the company expects earnings from continuing operations of 77-92 cents per share on revenue of $568-$593 million. According to Reuters, the analysts expect earnings of $1.21 per share on revenue of $624.2 million.

According to Scott Di Valerio, the Chief Financial Officer of Coinstar, who would become the Chief Executive Officer of the company on March 31, it would be difficult for current-quarter results to stack up against the amazing previous year’s first quarter results. He said, “We had two-thirds of our new unique customers show up in first quarter 2012. One of the challenges we are facing as we move into the quarter is content.” In January 2013, only 12 movies were released with a total box office receipts of $922 million as compared to 23 movies which were released in January 2012 with total receipts of $1.4 billion.

Dish Network (NASDAQ: DISH) also disappointed analysts. It reported fourth quarter profit below the analysts estimate as the cost of customers acquisition increased. The company’s net income decreased to $209 million from $313 million as compared to previous year. According to the data collected by Bloomberg, the average analyst estimate was $240.4 million. Sales decreased by 1.1% to $3.59 billion, above the $3.56 billion average analyst estimate.
Streaming First-Run Content

Netflix (NASDAQ: NFLX) partnered with DreamWorks Animation to develop its first original television series mainly for children. According to the company, the series Turbo: F.A.S.T. will be about the adventures of a snail that becomes super-speedy after a freak accident. In December, 26 episodes will be available to Netflix customers after the theatrical release of a Turbo film by DreamWorks in July. The new agreement is an extension of the earlier agreement entered in 2011 to offer films for kids such as Kung Fu Panda and How to Train Your Dragon. The other original series that are expected to be released in 2013 are Orange Is the New Black created by Jenji Kohan, a thriller Hemlock Grove and comedian Ricky Gervais’s Derek.

According to Jeffrey Katzenberg, the Chief Executive Officer of DreamWorks Animation, “Netflix boasts one of the largest and fastest-growing audiences in kids’ television. They pioneered a new model for TV dramas with House of Cards, and now together, we’re doing the same thing with kids’ programming.”

Reed Hastings, the Chief Executive Officer of Netflix, is trying to undertake big financial bets to protect the company’s future as the prevailing streaming-video service as the number of viewers moving online is increasing. He also said that the company’s efforts such as House of Cards and the revived Fox comedy Arrested Development strengthened its relationships in Hollywood and assisted in fighting off its competitors such as Amazon.

Amazon has also planned five pilots for original children’s shows and once they are completed, viewer’s choice will be determined to ascertain which one should be converted into a full-length series to operate on its streaming services in Germany, the US and the UK.

According to Scott Devitt, an analyst with Morgan Stanley, the company is focusing on creating a subscriber base that is less likely to cancel for competing offerings. The company is looking for Sony rights, declined to remark on whether it was outbid for the films.

Valuation

Let’s check if any of these stocks are attractively priced:

Ticker

Company

P/E

P/S

P/B

P/FCF

D/E

EPS Growth Next 5 Years

CSTR

Coinstar

11.6

0.68

2.81

5.87

0.7

17.6%

DTV

DIRECTV

12.06

1.02

NA

12.05

NA

15.8%

LGF

Lions Gate Entertainment

71.45

1.09

14.59

13.12

5.01

21.9%

DISH

Dish Network

21.27

1.11

146.21

9.05

95.18

4.8%

CMCSA

Comcast

18.22

1.72

2.17

14.57

0.79

16.6%

AMZN

Amazon.com

NA

1.97

14.71

305.43

0.38

40.6%

DWA

DreamWorks Animation

20.57

2.05

1.05

NA

0.14

11.0%

SJR

Shaw Communications

14.31

2.13

2.74

NA

1.31

6.2%

Coinstar is the only stock that should attract investors at current prices. It’s not meeting expectations, but it is really cheap. Unfortunately, DIRECTV has a negative book value for owner’s equity, which is not a good sign for future returns. The next cheapest stocks by the price-to-sales ratio are Lions Gate and Dish, and these are overleveraged.

Avoid the drama

Industry shake ups are exciting, but they are just another risk for investors to consider. Only Coinstar is appropriately priced as a speculative bet while other names on this list should be avoided.


BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Netflix. The Motley Fool owns shares of 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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