Why This Isn't a Great Discovery

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

After covering the heavy hitters, I came across a number of smaller, under-the-radar TV networks. The first channel that comes to mind is Discovery Communications (NASDAQ: DISCA), mainly because I really want to love the stock given its great documentaries. However, the valuation appears to be too rich, trading at over 30 times earnings. 

Discovery is a pure-play cable network company operating the the Discovery, Animal Planet and TLC channels, with expected revenue growth of 10% in 2013 thanks to its SBS Nordic acquisition. 

What's more is that founder John Hendricks has alluded to a streaming offering that could come about in the next few years. However, this remains a few years away. The TV company also has $6.4 billion in debt, compared to cash of $2.4 billion; not to mention its above-average valuation (more on this later)

Other niche networks 

Scripps Networks operates the TV networks that include the Food Network, Home and Garden Television (HGTV), Travel Channel and DIY Network. Scripps acquired the Travel Channel in 2012, and then in 2013 snatched up the Asian Food Channel. Revenue breakdown for its key segments includes 37% of revenue from the Food Network, 35% from HGTV, 12% from Travel Channel and 5.4% from DIY. 

AMC Networks (NASDAQ: AMCX) operates the AMC channel, with puts on such shows as Breaking Bad, Mad Men and The Walking Dead. Its other key networks include WE tv, IFC and Sundance. AMC managed to post 1Q EPS of $0.85 compared to $0.60 for the same period last year and above consensus of $0.80. 

Thanks to a streaming deal with Netflix, analysts expect revenue to grow by an impressive 15% in 2013. As well, AMC is expanding its operations to Europe and Asia. Its revenue breakdown shapes up as follows, 58% from affiliation fees and 42% from advertising. Both Comcast and DirecTV accounted for 10% of revenue each in 2012

Beyond TV

If investors are looking for a solid investment in the media space, Liberty Interactive (NASDAQ: LINTA) could be just what they ordered. Liberty Interactive is much more than a TV network, owning interests in various companies engaged in the video and online-commerce industries. Its key subsidiaries include QVC, Backcountry.com, Bodybuilding.com and it owns key interests in HSN, AOL, Expedia, Time Warner, Time Warner Cable and TripAdvisor.

Liberty Interactive's QVC division is seeing a surge in online sales, which are expected to make up over 50% of total revenue in the U.S. by 2014. QVC, behind only Amazon, is the second-largest e-commerce retailer in the U.S. QVC owns the $8 billion TV home-shopping market, with nearly 70% of the market share, dwarfing nearest rival HSN. 

QVC is also looking to further break into international markets, where 34% of its revenue is derived. After three straight quarters of earnings misses by at least 10% or more, Liberty Interactive is now trading on the cheap side of the industry (more on this later). 

What do hedgies think?

Discovery had some of the lowest interest among major hedge funds, with only 16 long the stock at the end of 1Q. Billionaire Mario Gabelli of GAMCO Investors has the largest position in the stock, worth $47 million and only making up 0.3% of its 13F portfolio (see Discovery's high yielders).

AMC had 26 hedge funds long the stock, a 24% increase from the previous quarter. Billionaire John Paulson of Paulson & Co. has a $374 billion position, making up 2.1% of its 13F portfolio (check out Paulson's cheap stocks).

Liberty has the top hedge fund interest, with 51 hedge funds long the stock. This includes JANA Partners, with the largest position -- worth $199 million and making up 4.1% of its 13F portfolio (see JANA's small cap stocks).

Don't be fooled

Discovery and AMC are trading at outsized multiples compared to Scripps and Liberty...

<img alt="" src="http://media.ycharts.com/charts/95920d420e49c2122f6a4449bcad229d.png" />

Liberty appears to be the cheapest. The company also trades at a 1.1 PEG ratio. I like Liberty for its revenue diversification and growth opportunities -- operating the QVC network. 

However, if investors looking for something a bit more sexy, AMC is definitely your best bet. What's more is that the company appears to be a solid growth-at-a- reasonable-price opportunity -- having a PEG ratio of less than 1.0 thanks to the relatively high expected EPS growth rate of 20% over the next five years. 

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends AMC Networks. 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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