These Three Media Businesses Could Deliver Nice Gains for Investors
Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Mario Gabelli, the founder and CEO of GAMCO Investors, is one of the most successful investors in the world. In the past 25 years, he delivered an annualized gain of 11.7%, beating the S&P 500’s return of 9.7% in the same period. In the interview with Barron’s, he thought that it was quite “an exciting time” for investors, due to the rising trend of spinoffs and buyouts.
He remains bullish on Viacom (NASDAQ: VIAB), the business that he recommended in the Barron’s Roundtable at the beginning of the year. Since the split occurred between CBS (NYSE: CBS) and Viacom in 2009, Viacom has been an aggressive cannibal of itself. Investing in a cannibal, Charlie Munger suggested, is one of the three ways to have successful investments. Let’s take a closer look to see whether or not Viacom is a good buy for investors now.
The Media Networks segment has a much higher operating margin
Viacom is a leader in entertainment content, operating in two main business segments: Media Networks and Filmed Entertainment. In Media Networks, the company has four main channel groups: Music & Logo, Nickelodeon, Entertainment and the BET Network, reaching 700 million households in more than 160 countries. Filmed Entertainment is comprised of Paramount Pictures, MTV Films, Insurge Pictures and Nickelodeon Movies brands.
While the Media Networks segment derived most of its revenue from advertising sales, the Filmed Entertainment segment generates revenue from the theatrical release and distribution of motion pictures. The Media Networks segment produced most of its revenue, $9.2 billion. This segment also enjoyed a much higher operating margin, at nearly 42.3%, while the operating margin of the Filmed Entertainment segment was only 6.74%.
An aggressive cannibal with the value of around $130 per share
Viacom has been buying back its shares aggressively. In 2009, it had around 755 million outstanding shares. It has spent $2.5 billion to repurchase 55.7 million shares in 2011 and $2.8 billion to buy back 59.9 million shares in 2012. In the first two quarters 2013, it repurchased additional 25 million shares for around $1.4 billion. In the second quarter of fiscal 2013, the share count stayed at 487 million. Gabelli thought that the share count would continue to drop to 310 million in the next three or four years. He said that it was buying the A shares along with Chairman Sumner Redstone.
Viacom is trading at around $66.80 per share, with the total market cap of $32.40 billion. The market values Viacom at 10.3 times its trailing EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). Gabelli commented that its private-market value should be in the range of $130 - $140 per share.
CBS and its REIT conversion of the outdoor business
The split of Viacom and CBS separated a fast-growing cable network and Paramount film studios from the slower-growing broadcast network and the declining radio businesses. While Viacom owns a fast-growing business, CBS owns the broadcasting network and radio business. Interestingly, both CBS and Viacom are under the leadership of billionaire Redstone. For the past five years, CBS has outperformed Viacom.
While CBS delivered the total return of 165%, Viacom’s total return to shareholders was lower, at more than 111%. CBS is trading at $47.70 per share, with the total market cap of nearly $29.3 billion. It is a bit cheaper than Viacom with an EBITDA multiple of 9.5. What might make investors like CBS is its plan to convert its outdoor-advertising business into an REIT and attempt to exit its European and Asian outdoor businesses. The REIT conversion of the outdoor business would unlock a lot of value for its shareholders.
Analysts have placed the value for its outdoor-advertising business at around $5-$8 billion, around a fourth of its current market capitalization. With a potential REIT conversion completed in 2014, the CBS share price might experience a 25% rise to nearly $60 per share.
Time Warner and its Time Inc. spinoff
Time Warner (NYSE: TWX), another peer, is the cheapest valued among the three. It is trading at around $57.50 per share, with the total market cap of $53.6 billion. The market values Time Warner at around 9.4 times EBITDA multiple. It operates two main business segments: Networks and Film, and TV Entertainment. In the first quarter 2013, Time Warner generated most of its operating income, $1.29 billion, from the network segment while the Film and TV Entertainment segment contributed only $365 million in the first quarter of 2013.
Looking forward for the full year 2013, Time Warner expects to have a low double-digit growth rate in its adjusted EPS. The upcoming spinoff of its publishing business, Time Inc., would certainly create additional value for its shareholders. Sterne Agee has rated Time Warner as a buy with a price target of $73.
My Foolish take
Time Warner and CBS could be nice plays on their corporate restructure and spinoff – Time Warner with its Time Inc. spinoff, and CBS with the REIT conversion of its outdoor business. Viacom, an aggressive cannibal when it comes to repurchasing its own stock, could be a good investment opportunity for investors because of its growing operating performance and its potential share buybacks in the future.
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Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!