Media Roundup: 1 Takeover Target, 2 Safe Buys

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

Although media can be very unpredictable, there are some companies that have recognizable brands that aren't going away any time soon. The best companies, however, don't rest on their laurels but seek to expand and diversify across different mediums. Investors are encouraged to back those firms as a way to hedge against macro volatility. Some companies, however, are not diversified but still undervalued as takeover targets. I similarly encourage investors to back those firms with the recognition that they are taking on greater risk.

Cablevision (NYSE: CVC): Worth More In A Combination

While the Street currently rates the stock around a "hold", I believe that multiples could elevate substantially from a takeover. In the past, the Dolan family has tried several times (and obviously failed) to buyout the business. The brand, however, is still strong and would provide considerable accretive value in an industry combination as opposed to a private buyout.

The business has been through executing two spin-offs (Rainbow and Madison Square Garden) and is thus ideally operating in a niche market (ie. cable) for proper risk-based investing. Over the years, it has also been through a series of managerial missteps that have caused the market to underappreciate the otherwise strong fundamentals. Dominant penetration rates compared to peers, coupled with cable ARPU (average revenue per user) of $150+, showcases these strong fundamentals. And while the decision to hike dividends twice and implement a share repurchasing program have helped win back investors, operational headwinds now loom over the business like a dark cloud.

Macro prospects weaken while competitive pressures increase more and more each year to limit organic growth opportunities. Realizing this, suitors are likely to jump in and make a tender offer for the outstanding shares. The access to over 3 million users in the New York-Connecticut-New Jersey area provide meaningful cross-selling opportunities for larger media companies.

CBS (NYSE: CBS) & Disney (NYSE: DIS): Both Organically Undervalued

Disney has generated double-digit returns for shareholders over the recent months, and it is positioned to continue to outperform through organic growth alone. It retains a dominant market share in sports broadcasting and has plenty of room for further penetration under buoyant secular trends in technology. Parks have meanwhile picked up above expectations and continue to reinforce the media business through brand appeal. This has been concurrent to margins expansions, which sets the stage for exceptionally strong returns during a full recovery.

Perhaps most importantly, Disney is also relatively a safe stock. While media can largely be unpredictable, Disney isn't going away any time soon. And, should business in parks slow from a double dip, that bears no impact on business for ESPN or the Disney Channel. Accordingly, I recommend buying to take advantage of the compelling risk/reward.

CBS is similarly an attractive business. It is forecasted for 6% EBIT growth through 2016, which I think sets the bar low for outperformance. With the stream of free cash flow coming in from political advertising, it should be able to make a move towards inorganic growth. Penetrating more online markets, like those targeted by Hulu and Amazon, would turn the business more into a diversified media operator. Given that the business is a ratings machine, it can leverage its strong reputation into new segments much like what Disney has done over the last two decades.

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.

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