Get Real, People!!
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There is a lot of content available for your viewing pleasure out there. Despite the relatively few videos that go viral on YouTube, most people are used to slightly better production values, even if it's reality TV. Who are the beneficiaries of this need for voyeurism? Not the telecom carriers or the cable delivery systems; it's the content providers and the ones flying under the radar that are the reality content providers.
The premier how-to reality name is Scripps Network Interactive (NYSE: SNI), with their upscale lifestyle brands: HGTV, Food Network, GAC, Travel Channel International (acquired in Q2 this year), and the two premium channels, DIY and Cooking Channel. The company just reported solid Q3 results on Nov. 1, reaffirming guidance and generating $435 million in free cash. The P/E is 18.17 to a forward P/E of 15.80.
Total revenues were up 12% for a $0.78 EPS, with ad sales up 10% and affiliate fees up 18%. 70% of the company's revenue comes from advertising. The Board also authorized another one billion dollar share repurchase program, but did not purchase shares in Q3. When asked in the Q&A why not, CFO Joe NeCastro said the price had run up "fairly aggressively" and the Deutsche Bank analyst tried to trip him up asking, "So are you implying at this point you think the stock is fairly valued?" And CFO NeCastro gave him a decisive "NO, we're not." Case closed.
Indeed, the share price has risen 48.84% over the last year. They own 95% of their content and offer a .80% yield. The company also operates show-related web sites, with show-related merchandise for sale and mobile apps.
Listening to calls is generally pretty yawn-inducing, but my other favorite quote was CEO Lowe describing some of the more reality-based new shows planned for 2013 as,"Taking G-rated voyeurism to a whole new level." That's really what it's all about. Reality and how-to is just much cheaper to produce than story-based entertainment with actors (of whom director Alfred Hitchcock said,"I never said all actors are cattle. I said all actors should be treated like cattle.")
One of Scripps' biggest rivals is Discovery Communications (NASDAQ: DISCA), which just reported on Nov. 6. They don't compete on exactly the same content, but they do compete for the same affluent viewers. Their three most successful networks are Animal Planet, Investigation, Discovery, and Science, and the flagship brands are Discovery and TLC. (The Learning Channel). CEO David Zaslav was quite optimistic for growing Discovery internationally, but net income dropped from $0.60 a share a year ago to $0.57 and revenue fell to $1.08 billion. This surprise disappointment came on the heels of four consecutive earnings beats. It was mostly attributed to weakness overseas, currency conversions, and taxes related to its sell off of Creative Sound Services.
Their biggest successes this year have been "Gold Rush," the ever popular "Shark Week," and (whether you like it or not) "Here Comes Honey Boo Boo." It drew 2.5 million viewers over the season. It certainly underscores famed showman P.T. Barnum's belief, “Nobody ever lost a dollar by underestimating the taste of the American public.”
That said, free cash flow increased 12% but was slightly offset by content and programming costs. They have over $1.6 billion in cash and have been deploying that in buying back shares, 70 million shares since 2010 reducing the float by 16%. It has a P/E of 20.76.
Actually both stocks compete on the reality front with many other networks including the big four ABC, NBC, Fox, and CBS but even PBS is getting into the act with a reality based show of antiquers competing against each other. Also competing is A&E Television Networks LLC (privately held) which runs exclusively "real time drama" including Duck Dynasty, Hoarders, Intervention, and the like.
But the bigger dog in the Reality House is Viacom (NASDAQ: VIA), owner of "Jersey Shore," Spike, MTV, Nickelodeon, Paramount Studios, VH1, Comedy Central, and BET, among other entertainment ventures. It has a 14.74 P/E and a 2.20% yield. Those are pretty good numbers for an entertainment company; in fact, those are more like a bank's numbers. RBC Capital raised their price target to $62 on Oct. 16 and reiterates its outperform rating.
But the company has debt totalling $8.16 billion, compared to total cash of $774 million. The shares are very thinly traded for such a large company with average daily volume of 21,000 shares; and that's mainly because insiders hold almost 80% of shares.
In early October a prescient analyst for Bernstein Research, Todd Juenger, downgraded the stock to Underperform with a price target of $50 (closed at $50.84 on Nov. 7) based on the MTV lineup not appealing to teenagers and not contributing its usual 18% to total ad sales. He also decried the probable last season of the profitable Jersey Shore, and continuing weakness from Nickelodeon.
Which reality-based network will make your portfolio? You can go the sideshow route and get the most outrageous reality shows, the P.T. Barnum thesis, and go with Viacom or Discovery; or you can go the how-to reality route with the better viewer profile, the one more attractive to advertisers. Scripps is a more stable stock and has performed better this year, and is committed to share buybacks and dividends.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Scripps Networks Interactive. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.