Why You Should Watch these Cable Broadcasters

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

A migration of broadcast TV viewers to cable has helped certain companies enjoy solid earnings growth and stock price appreciation. The winners in this race will continue to be not only those networks owners that generate increased advertising demand through ratings increases, but the ones expanding their audiences by way of greater distribution and those that command higher affiliate fees.

Something Old and Something New

On that note, we have to discern between advertising-dependent networks such as Viacom’s (NASDAQ: VIAB) MTV and Nickelodeon, and premium networks, as owned by the newly created Starz (NASDAQ: STRZA). The former is a soundly managed company that should continue to provide value to investors over 3 to 5 years. In fact, Viacom owns several of the most-watched cable networks, such as MTV, Nickelodeon, BET, and Comedy Central. It also operates Paramount, the film production company. All told, Viacom derived 32% of fiscal 2012 (ended in September) revenues from advertising sales, with the remainder stemming from affiliate fees and film receipts/home entertainment/TV license fees.

As for Starz, a spin off from Liberty Media, it could potentially reap gains from growing subscription counts at the Starz and Encore networks if costs are kept under containment. The company realizes most of its revenue from cable providers in the form of subscriber payments. Both networks broadcast feature films without commercials, charging either per month or as part of a package. The ongoing expansion of digital cable and HD is facilitating growth in the customer base. An added bonus would result from climbing revenues at its Home Video and Digital Media unit, a business dependent on the popularity of current film releases. The shares may be worth owning for exposure to the premium cable market.

All About Cable

Along the lines of companies with nearly 100% of their asset bases being cable networks, there are a few that stand out. One, Discovery Communications (NASDAQ: DISCA), is a growth story. The owner of TLC, Animal Planet, and others is largely realizing increased rates on distribution contracts and advertising, while benefiting from the rising number of people with access to its programming. The company's shares have outperformed the S&P 500 significantly over the past several months, but might still have upside given the likelihood of accelerated bottom-line advances this year. Discovery boasts a burgeoning international operation, too, that it is looking to expand further.

Secondly, viewers are apparently flocking to the networks owned by another company, Scripps Networks Interactive (NYSE: SNI). The operating revenues derived from its top three holdings, namely Food Network, HGTV, and Travel Channel, are together increasing at a near double-digit clip. Others like DIY and the Cooking Channel are growing much faster. Management’s focus seems to be the investment in programming quality, particularly at its key channels. A departure from other companies that are aiming to up subscriber numbers, the strategy is allowing Scripps to thrive. Of course it is somewhat reliant on ad pricing and spending by major advertisers. That said, earnings are apt to advance nicely again this year. The stock is thus a good pick for most investors at this time, as it trades at less than 20 times forward earnings based on analyst consensus.

Review

In conclusion, I suggest looking into the equities of cable network owners because of the positive factors inherent in the industry at this juncture, specifically rising audience shares and expanded distribution. Over time, it will be important for such companies to maintain viewership through digital and online platforms. Certainly, overseas markets still represent growth opportunities. As always with media stocks, a prospective investor must consider the proportion of assets in each business line, as numerous cable network owners also hold film and traditional network (ABC, CBS) properties.   


dctotal has no position in any stocks mentioned. The Motley Fool recommends Scripps Networks Interactive. 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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