It’s Show Time For These Entertainment Stocks

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

While looking at the entertainment industry stocks, Time Warner (NYSE: TWX) still remains an interesting pick at this moment. Though the recent multi-year agreement between the Oprah Winfrey Network (OWN) and Tyler Perry has created few doubts, I don't feel this will have any significant negative impact on TBS (channel owned by Time Warner). As part of this deal, Tyler Perry will bring a new television series to OWN expected to be launched in 2013. It could bring a huge opportunity for OWN to boost its profitability in the second half of 2013. Prior to that, Tyler was associated with TBS and the company highly benefited from its three popular shows: House of Payne, Meet the Browns, and For Better or Worse. Even after this deal, one of these three series will continue on TBS and all the new dramas will move on to OWN. I believe this would have just a minor impact on Time Warner, as Perry's shows have already reached their highest contributions and they only account for just ~2% in the total viewership. I expect a modest hit in revenue till Q313 which would disappear after that.

Lions Gate Entertainment (NYSE: LGF) has been distributing Tyler Perry films and TV shows (including the three on TBS) and should also have a limited negative impact after this deal. Lions Gate's TV segment generates ~$400 million a year and the Perry's shows contribution was already diminishing in the last few years along with their margin, which was already comparatively lower than other TV deals. On the other hand, investors can anticipate Lions Gate's TV revenue to make a jump to ~$450-500 million with a strong pipeline of future projects such as Anger Management, Nurse Jackie, and a comedy with George Lopez. Moreover, the company continues to be the distributor of Tyler Perry’s successful films series. The scheduled releases are Marriage Counselor, We the Peeples, and Madea's Christmas in 2013 and Single Moms Club in 2014 and more.

Another big player in the entertainment industry, Disney (NYSE: DIS) recently posted its full year earnings for 2012. This year was highly successful for the company in terms of strategies as well as financially. It posted a net income of ~ $5.6 billion up by ~18% y/y, which was majorly supported by its theme Parks and Resorts segment. To continue with the same trend in its financial results, Disney recently announced a new multi-year distribution agreement with Cox Communications. Under this deal, Disney's sports, news and other entertainment content (~70 Disney Services) will be delivered to Cox customers via TV, computers, smartphones, tablets and gaming consoles. This deal will further enhance the prospects for both the companies to deliver the best of the content to its customers on diverse platforms. It will also include a variety of ESPN launches which would be made available to Cox customers for the first time. This deal will further add to the multichannel subscription model of Disney and would increase its customer base.

Coming back to Time Warner, I am highly positive on its Film Entertainment segment (Warner Bros) which holds almost half of the company's revenue. The fourth quarter saw the release of the movie 'The Hobbit' which has already earned ~$500 million worldwide. Also the home video release of 'The Dark Knight Rises' will further boost the quarter earnings, as the movie has done exceptionally well at the box office by generating ~$1 billion. Under television, Warner Bros had announced launching of as many as 25 new series for 2013 as its prime time shows. This move will help the company to sustain its leading position in broadcast programming. Another favorable aspect for the company's earnings is that 90% of its affiliate fee deals are to be renewed in mid-2013. With the improved ratings of its television shows, the company has an opportunity to gain higher deal values for 2013 & 14.

One more thing on which I am placing my bets on is its SVOD (Subscription Video on Demand) segment. The company has locked in ~$250 million of SVOD deals YTD. To further gain from this, Time Warner signed a contract licensing agreement with Amazon to add TNT's 'Falling Skies' and 'The Closer' to its prime instant video catalogue. This deal will prove highly profitable for Time Warner's divisions as it offers a scope to attract new customers towards its established dramas. Amazon would be a great platform for this company to showcase its popular TV titles for a wider set of audiences.

Summing it up, all the three stocks from the entertainment industry seem favourable; however Time Warner remains my top pick at present. Its stock has shown an attractive growth of ~30% YTD and has outperformed S&P 500 since the last six months.

 

Source: Yahoo Finance 

I see a huge strength in the Filmed Entertainment and Networks which will offset any weakness in the other segments. Looking at its strong growth prospects, I expect a growth of ~12% in the EPS in 2013 and 2014. Also, I anticipate the stock to further outperform the market by ~15% in the next 12 months. 


ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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