3 Entertainment Stocks to Include in Your Portfolio
Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The entertainment business provides plenty of growth opportunities for those smart and capable enough to seize them. Historically dominated by major players like Twentieth Century Fox, News Corp., Walt Disney and Warner Bros., this segment is all about being big and playing big: big budgets, big films, big screens, and big cable networks.
In this article, I will look at three large companies within this segment that operate in different parts of the chain, profiting from mutual success. The three are a movie production company, Lions Gate Entertainment (NYSE: LGF), a movie theater technology producer, IMAX (NYSE: IMAX), and a cable company, Comcast (NASDAQ: CMCSK). Offering compelling long-term prospects and plenty of mutual growth opportunities, these three firms are worth your attention.
Lions Gate: Motion picture and television programming
First off is Lions Gate Entertainment. It produces and distributes motion pictures and television programming and also has presence in other segments such as home entertainment, digital distribution and new channel platforms. Although its stock has been experiencing constant upsurges and currently trades close to an all-time high with a valuation of 18.1 times its earnings, it still trades at a 14% discount compared to the industry average. Expected to deliver annual earnings-per-share growth rates around 25% over the next five years, I’d strongly recommend BUYING and holding on to this company's stock.
This company first fell onto my radar after it reported its last quarterly results and vastly surpassed consensuses, with a revenue growth rate of 21.8% to $785.7 million which was driven by robust performance in the home entertainment, international and LionsGate U.K. operations. The company outperformed its peers such as Cinemark Holdings and DreamWorks Animation in sales, earnings and share growth.
Over the years, Lions Gate has proven successful in producing small and mid-budget specialty films and sharing production costs through co-production agreements. “Moreover, keeping production costs low often involves paying talent low upfront salaries and awarding financial participation in a film’s profits.” (Zacks) This has resulted in a 104% return on equity trailing twelve months and an 8.4 return on assets, both well above the industry means.
Going forward, its motion pictures –including blockbusters like the Twilight Saga and The Hunger Games- for both cinemas and TV and series production should drive growth higher while strategic acquisitions and partnerships will diversify its portfolio, increasing its market presence and returns. Moreover, its success at the Cannes Film Festival and an alliance with Internet Explorer will reward shareholders in the near term so you should get a hold of these shares before it’s too late!
Imax: Dominance in large - screen format
Imax is the next company in my segment overview. The company produces entertainment products, focusing on film and digital imaging technologies including giant-screen images, 3D presentations, post-production and digital projection. For years it was the only major provider of large-screen format films. Due to its high pricing, however, it wasn’t until 2008 when Imax Digital technology (which was cheaper than its predecessors) was launched that the firm became really popular. Now the company operates in over 700 theater locations and “through a mix of sales, leases, and joint revenue-sharing agreements with traditional theater operators, Imax's technology is now embedded in the large majority of the industry's large film screens.” (Morningstar)
Trading around $26.5 per share, the company is close to a 3 month low and provides a good entry point for long-term investors. Although its valuation doesn’t look very attractive at the moment, earnings-per-share growth is expected above 32% per annum for the upcoming years. Consequently, I would recommend BUYING and holding on to this company's stock as its long-term prospects look promising.
Looking ahead, analysts expect Imax’s dominance in the large-screen format to continue. The company's management calculates that the market can support yet another 1,000 profitable theaters, with the U.S. and China leading the bunch. A deal with the big Chinese firm Wanda Cinema Line will significantly increase the company’s presence in that country. Moreover, this target has been constantly increasing through the years and will most likely continue to grow as the firm penetrates new markets. Emerging economies with fast-growing gross domestic products and middle classes offer plenty of growth opportunities in an environment with reduced competition.
Further market share should be gained thanks to its technology that substantially cuts the costs implied in analog film distribution. Additionally, the company's recently-announced intention to start selling high-end $2 million home theater systems to individual customers could boost the firm’s revenues and margins even further.
Comcast: Cable operator
After a movie is produced and screened at theaters, it eventually arrives on TV. This is where Comcast comes in. As U.S.´s largest cable operator with over one fourth of the market share, the company serves approximately 22.525 million video customers, 17.550 million high-speed Internet customers, and 9.063 million phone customers; this is a company to watch. Although the company is expected to deliver industry-outperforming earnings-per-share growth rates of around 18% each year for the next five years, its stock currently trades at a 19.5% discount in comparison to its peers´ average. It is valued at 16.5 times its earnings, offering an attractive entry point for long-term investors.
Although it is a diversified business that constantly expands its product offering –as evidenced by its recent purchase of NBC Universal- its cable operation remains its core business. In my view, one factor that has been determinant in Comcast’s leading position within the U.S. market is its capability to offer television, Internet, and phone services (often known as a “triple play”) through one sole network. Although large competitors like AT&T and Verizon have tried to emulate Comcast by offering television services, its impact on Comcast’s market share remains marginal.
To cope with the advance of digital media, the company has focused considerable efforts on developing new web and tablet-based platforms and creating incentives for customers to stick to the service through exclusive content agreements with important producers as well as new creative capabilities provided by the NBCU acquisition. Moreover, the company's important stake in the Internet segment also helps it face the increasing migration to the web by bringing in revenues from this source. Reflecting plenty of confidence in future results and a strong financial situation, the management has been approving several billion-dollar share repurchase programs over the past few quarters and yielding 1.76% in the form of dividends.
Above I have succinctly described three companies that operate different segments within the entertainment industry ranging from the production of content to its arrival to TV, typically going through the cinemas –although not always. Holding leading positions amongst their industries and offering compelling growth prospects and expansion plans for the years to come, I’d recommend adding LionsGate, Imax and Comcast (Class A stock) to your long-term portfolio. In compound, these companies are expected to deliver an average earnings-per-share annual growth rate of around 25% for the next five years, comfortably outperforming their peers and the general market.
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Damian Illia has no position in any stocks mentioned. The Motley Fool recommends Imax. The Motley Fool owns shares of Imax. 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!