How Much Juice Is in these Entertainment Companies?
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Entertainment companies are powerhouses of intellectual property. Sometimes they are able to draw upon decades of characters and make profits even during bad times by rehashing old stories or re-releasing old material. This is one of the strongest moats there is.
When an entertainment company has long-term connections to distributors and popular properties, it can virtually mint money. However, there is always the need to produce new content. Let's see how a few entertainment companies are operating as the recession's escapism wanes.
Too much opportunity to pass up
Time Warner (NYSE: TWX) is the largest media conglomerate in the world, and the second-largest entertainment conglomerate in terms of revenue. Time Warner can always turn some profit by using its New Line ownership of the Nightmare on Elm Street franchise to crank out another Freddy Krueger movie -- the world can't get enough of them. Time Warner also has plenty of classical content via Hanna-Barbera that appeals to the Generation X crowd. Partially because of these options, the company is turning an 11% profit margin and is able to pay a 2% dividend.
I suggest watching Time Warner primarily because of the potential profitability of the intended spin-off of Time in late 2013. Historically, spin-offs have a tendency to be good chances for companies to focus on their core businesses, as well as unload debt and other unprofitable components of themselves onto their offspring. Nonetheless, these new businesses can often thrive by being more deeply connected to their core markets and can better satisfy their needs.
Time Warner still hasn't managed to make HBO relevant to the portable media market -- they're still hooked on cable. This is probably a portion of why the company is trading for a half-decent 18 times earnings and 1.8 times book value. With the spin-off potential and the off chance that HBO will eventually get its act together and break the cable, I'd suggest taking a chance on Time Warner.
Serious Prospects in Non-serious Media
Walt Disney (NYSE: DIS) is the biggest revenue generator of all entertainment conglomerates. Disney owns a mountain of intellectual property, including the Marvel universe of superheroes, Pixar, ABC and obviously all of the Disney characters. The company can put these characters on virtually anything, and has both media networks and consumer products divisions standing by to reap the rewards of doing so. As such, Disney has a healthy 13.6% profit margin and plenty of cash flowing through it to last through most anything. Moats don't get much wider and deeper than this company has.
Disney has a brilliant marketing method, though not a unique one. With most advertisements, the public gets the commercial message for free. When it comes to the characters in movies, however, people pay to see what is essential an ad for movie merchandise.
The only downside I can see to Disney is that it can run afoul of its own size. Firstly, a company this large can be incredibly complicated to run. Past directors and chief executives have had issues with mismanagement and flops at the box office, which cost the company dearly. A few poorly received movies can put a serious damper on the entire operation.
Also, having such a massive pool of intellectual property to draw from can lead to decisions that aren't popular at the time. While creating a cult classic is great, movie makers earn most of their acclaim and profits during opening weekend. Had The Avengers been released in 1998, computer graphics technology notwithstanding, there's a good chance it wouldn't have been nearly as large a hit as it was in 2012.
While Disney is a complicated company, it's still trading for a relatively inexpensive 19 to 20 times earnings. This isn't much higher than the S&P 500, and Disney has a lot that many companies don't. So I'd recommend it wholeheartedly.
World Wrestling Entertainment (NYSE: WWE) has one of the silliest business models around. The company promotes pseudo-sports that it has outright admitted are fake and pre-determined to crowds who love it anyway. As the largest promoters of synthetic athletic contests with a large fan base, the WWE has a pretty solid moat. It also has a pretty decent 4.9% dividend yield.
Wrestling goes through phases of higher and lower popularity, and as of the past few years it's on the lower end of the sine wave. Also, the WWE is trading at more than 38 times its earnings as of this writing. In addition, the WWE is only pulling 3.9% profit margins. If the faux sport's popularity stays low for awhile, the overhead of the music and merchandising components may weigh down the company into unprofitability. Also, the McMahon family has a 96% voting hold over the company -- so ordinary shareholders shouldn't expect their opinions to be considered.
Overall, I only recommend the WWE if you believe that you can hold on through several low-profit years until this type of exhibition's popularity soars once again. This could be a solid contrarian play if you can find the WWE during a nice dip.
The Foolish bottom line
Entertainment has great potential for profit, but it is not guaranteed. Ultimately, entertainment companies rise or fall on the popularity of what they have to offer, and the public's tastes can be fickle. Ultimately, having a wide net of different intellectual property and the ability to efficiently market it all determines how well it ends up doing.
It's easy to forget that Walt Disney is more than just the House of Mouse. True, Disney amusement parks around the world hosted more than 121 million guests in 2011. But from its vast catalog of characters to its monster collection of media networks, much of Disney’s allure for investors lies in its diversity, and The Motley Fool's premium research report lays out the case for investing in Disney today. This report includes the key items investors must watch as well as the opportunities and threats the company faces going forward. So don't miss out -- simply click here now to claim your copy today.
Chris Hodge 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!