What Does The Media Industry Hold for an Investor?

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

Last week was big for the media industry, as three of the biggest companies in the sector announced their results. Time Warner’s (NYSE: TWX) net income grew by more than 50% in the last three months of 2012, as fees from cable and satellite companies increased and ad revenue at TV networks also surged up.

The company reported revenue of $8.16 billion, which was flat compared to the same quarter last year. Net income was $1.17 billion, up from $773 million a year earlier.  The boost in profits will benefit investors, as the company has authorized $4 billion for share buybacks.  Moreover, the raise in the quarterly dividend by 11% to $0.29 will bring more joy to investors.

The company has faced some trouble in generating revenue as some of its international businesses closed, CNN ratings were weak, and its publishing revenue declined. On the bright side, Time Warner’s more dependable TV business is going strong as Cable and Satellite Operators in the U.S. are paying more to transmit channels such as TNT, TBS, and CNN from their network.

HBO’s horizon is continuously expanding. Game of Thrones and True Blood had a phenomenal viewership of 12 million viewers per episode a couple of months back. There has been 30% growth in subscribers for the network internationally in Q3 2012.

The standard of comedy at TBS has improved of late and with successful syndicated series like The Big Bang Theory it looks well positioned. Furthermore, the network will launch some new originals and has announced a contract with Major League Baseball until 2021.  TNT shows such as Major Crimes, Perception, and Dallas are also performing well.

Time Warner should have a stable year ahead with increased original programming and high quality syndicated shows.

Surfing other networks

The Walt Disney Company’s (NYSE: DIS) recently declared earnings were a touch better than analyst expectations, in terms of both revenue and profit. I believe  the company is looking for a very good year ahead. Though the stock prices are at their all time high, I am still bullish on the stock.

ESPN is deriving good returns for the company thanks to the inflation in sports rights.  The increased rights fee is being passed on to the customers through cable and satellite distributors by way of increased affiliate fees. This benefit will start giving results in the coming quarters.

Parks and Resorts shall be the center of the Disney’s revenue in the coming period as the company’s heavy capital investment will start to pay off with increased spending and visitation. Spending in Shanghai and China should improve as Disney has a very strong brand image there and derives the same benefits like the park in California.

Studio entertainment revenue has struggled in the first quarter because of higher distribution and film costs coupled with low demand for feature releases. However, the acquisition of Marvel Comics, and more recently, Lucasfilm, position it better than before. The Lucasfilm acquisition adds Star Wars to the company’s portfolio and increases its scope to attract action-oriented audience in addition to its traditional Disney princess space.

News Corp (NASDAQ: NWS) also had a good quarter, as revenue moved north 5% compared to the same quarter last year as the company’s cable business performed well. Its adjusted earnings came in at $0.44, slightly better than the consensus expectation of $0.43.

News Corp is more dependent on cable business as it forms about 55% of its value. Subscription is the major source of revenue for the cable business, as it is paid on regular basis, thus providing stability to the company’s top line.

Fox Sports is a key driver for the company, as currently the demand for sports programs is high. News Corp’s recent agreements with Major League Baseball and NASCAR, as well as acquisition of Disney’s stake in ESPN Star Sports, will drive more viewers to its side. Performance of Fox News has been better than its competitors and has drawn large a audience since the U.S. presidential elections.

The boost in the macro-economic environment and increased political advertisement spending can help the company enhance its revenue. The bright side is that there has been reasonable growth in spending over TV advertisements in the U.S. in 2012, although TV viewership declined.

From the valuation standpoint

Time Warner’s trailing P/E ratio is 17 times and has a forward P/E of 12 times. HBO is the company’s most critical business, and contributes more than 20% of its revenue. HBO’s operations are expanding domestically as well as internationally, which should bring a positive impact on the company. Time Warner has a low PEG ratio of 1.17, which means that there is a lot of growth ahead for the company.

Disney currently has a trailing P/E ratio of 17.5 times and a forward P/E ratio of 14.  It might look overly priced as its net income has fallen slightly, but improved movie business and increasing demand for sports should support the current valuation. This company is a good buy.

News Corp's trailing P/E is 26 and forward P/E is 14. It is trading on a premium with the belief that a split of company between the publishing and media and entertainment businesses will allow management to focus better on their performance and improve the bottom line. However, the entire process will take a year to deliver so investors can keep a close watch on this stock for the time being.

niteshsanthalia has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. 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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