Disney More Attractive Than Viacom, But Both Undervalued

By David Gould - September 9, 2012 | Tickers: VIAB, DIS | 0 Comments

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Part of what I love about media is that it is straightforward and all about brand. While consumer preferences in the industry are largely unpredictable (humans are fickle), some media producers can deliver time and time again. Those businesses tend to be diversified in mediums ranging from the Internet to television to radio and beyond. "Beyond" you say? Yes, and by that I mean firms that also own, say, theme parks and toys. Disney (NYSE: DIS) is one iconic brand that is tremendously undervalued despite excellent fundamentals. While I also recommend diversification in Viacom (NASDAQ: VIAB) and News Corp (NASDAQ:NWSA). Disney is my top pick for the industry.

Disney

You would think that now, with the economy uncertain, investors would diversify across safe stocks in various industries. Disney, however, is still cheap. While it trades at a respective 16.4x and 14.3x past and forward earnings, which seems high, the historical 5-year average PE multiple is 15.1x - not much lower.

On a fundamental level, there are several things to love about Disney. The company is making large investments in parks and resorts, which I believe will help solidify the firm's brand name while developing supportive cross-selling opportunities. For example, the company is not only transforming Disney California Adventure, but it is also increasing the size of Disney's cruise ship fleet. It used to be all about parks and movies; the focus on cruises is transforming Disney into more of, yes, a "fun" business - a business that you go to for vacation and recreation needs. While Disneyland Resort had record 3Q attendance, new launches, like Disney Fantasy in March, have more than doubled the guest capacity of the cruise lines.

At the same time, Disney is also taking on the international front. Expansion in Hong Kong Disneyland and the investment in Shanghai Disneyland position Disney to cross-sell media products to high growth emerging markets. Beyond cruises and parks, the legacy business is acquiring top brands, like Marvel in 2009, to establish a leading authority. Marvel's The Avengers has grossed nearly $1.5 billion in the global box-office while Pixar's (another Disney acquisition) Brave took the #1 spot in the US. I recommend buying shares now of this stable and growing business.

Viacom

While also undervalued, Viacom is, in my view, less attractive than Disney. The firm owns top brands, like MTV and Paramount Pictures. The PE multiple over the TTM is 11.2x, which is 86% of the industry average and even less than the market average. With a 5-year PEG ratio of 0.72, the market is also not fully factoring in immediate growth prospects.

Assuming the company is able to meet expectations for 15.1% annual EPS growth over the next five years, 2016 EPS would be $7.28. At a 15x multiple, the future value of the stock would then be $109.20. Discounting backwards by 10% yields a present value of $67.80, which is at a 38% premium to the current market valuation. This comes on top of a 2.2% dividend. Thus, Viacom not only has strong upside but a large margin of safety.

In terms of efficiency, the company is very productive with $1.4 million in sales per each employee, which is more than 2.5x the industry average. My one main concern with the firm is a failing emphasis to showcase the brand through various mediums. Analysts seem to share the concern, as evidenced by the "hold" consensus on the Street. News Corp appears nearly just as cheap at a 11.9x past earnings for 16.6% annual EPS growth forests; but, unlike Viacom, it has spread its brand image through various mediums. Perhaps this is the reason why analysts are more bullish on the stock.

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