2 Media Stocks NOT to Buy

By David Gould - September 18, 2012 | Tickers: NWSA, NYT, DIS | 0 Comments

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Although media happens to be one of my favorite industries, there are a dearth of good stocks out there. After much shareholder pressure, News Corp (NASDAQ: NWS) recently decided to split. But after rising nearly 50% over the last 12 months, the stock is starting to look overly expensive near its 52-week high. On the other hand, it has an impressive economic moat that is diversified and can be used to cross-promote various promising assets from Fox News to the Wall Street Journal. By contrast, The New York Times (NYSE: NYT) looks fundamentally weak. Disney (NYSE: DIS) is even more undervalued than both with better brand lines and diversification than News Corp and The New York Times.

For all of its strengths, Disney has not been very good at growing free cash flow over the past few years. FCF over the TTM ending 2Q12 was $4.7 billion - not much higher than $4.2 billion four years ago. At the same time, the company trades at a premium of 17.3x to its historical 5-year average PE multiple of 15.1x. Moreover, the company is at not only its historical 52-week high but also its lifetime high valuation of $93.6 billion.

I have been a bull on Disney for some time, and I continue to be for one reason: The company is so secured in media where others are hanging by a thread that it is bound to continue to penetrate the market. The firm increased earnings by 9.5% annually over the past five years during the Great Recession, and analysts still expect annual EPS to go up 13% each year over the next five.

Demand, moreover, has been so high for the theme parks that Disney is building more of them. They extend from Florida to California back over to China and into, in a sense, the family room where Disney products are being viewed every day. Disney also has a virtual monopoly position on sports programming with ESPN - a business that you wouldn't even think of as part of the house of Mickey Mouse.

The New York Times and News Corp, on the other hand, both look expensive. The New York Times trades fairly high at 14.7x forward earnings and doesn't even have the growth to justify it, with forecasts of 7.7% annual EPS growth over the next five years. Analysts rate the stock a 3 out of 5, where 5 is a "sell," and ROA, ROE, and ROI are all in the low single-digits. The firm still operates largely as an internet newspaper that is struggling with poor advertising results. In fact, FCF over the TTM ending 2Q12 was $68.6 million versus nearly $100 million one year ago. Businesses have been so poor that the New York Times recently decided to sell About.com for $300 million. The company paid $410 million for the site, but you probably did not know that based on how poorly they have integrated and cross-promoted the business. Unfortunately, it's more likely a downside than upside story from here based on little signs of a managerial turnaround.

News Corp has slightly better, although still weak, promise compared to its liberal counterpart. The company recently saw aggressive hedge fund buying with Highfields Capital scooping up 37.4 million shares. Although growth potential has made corporate scandals less of an issue, Murdoch's decision to retain control as Chairman & CEO of both companies ex-spit will be a headwind to value creation. The $15.2 billion in debt on the balance sheet also increases risk right now, since the market is still debating how this will be split. Accordingly, I recommend not buying. If you are going for firms with similar risk but higher reward, I urge you to consider businesses like Entravision Communication that are just starting to gain visibility on the Street. Entravision, for example, targets the high-growth Hispanic market in the United States. For right now, however, such an investment should be made alongside one in Disney, which has leading diversification in media.           

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