Buy the Right Media Stocks This Way...
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the last six months, Time Warner, Comcast, and News Corp have risen 20.5%, 21.3%, and 25.9%, respectively. While media can be recession proof, consumers are very unpredictable and should thus limit multiples. I recommend diversifying in the stable brands that can penetrate markets in the long-term while staying away from more speculative brands.
At a respective 20.6x and 16.4x past and forward earnings, Comcast is more expensive than both peers and the S&P 500. While the company is able to command a premium due to its brand name, it is still considerably higher than the historical 5-year average PE multiple of 17.7x. The company has outperformed peers Time Warner and News Corp over the last six months off strong results.
The company beat expectations all of the last three quarters by an average of 7.7%. Free cash flow has meanwhile risen dramatically from $5.6 billion for the TTM ending 2Q10 to $9.8 billion for 2Q12. However, the past is no indicator of the future, and the advertising market looks weak according to Barclays. In fact, consumer uncertainty has been so high that Barclays cut domestic advertising growth down to 2.3% from 4.6%. Comcast, however, has taken advantage of low interest rates by taking on leverage to finance growth. Analysts forecast the company to grow by 15.3% annually over the next five years, which is strong enough by itself to keep multiples elevated. Although I find the stock pricey at current levels against other media companies, like Disney, it is relatively safe from macro headwinds given the growth trajectory.
Time Warner is slightly cheaper at a respective 17.9x and 14.1x past and forward earnings but still elevated against historical levels. However, unlike Comcast, consumers are somewhat predictable. While interests in entertainment change without notice (and perhaps without reason), interests are more loyal towards cable service network. The company is also raising debt ($1.3 billion). This will be used more to pay off SG&A than to fuel growth.
All things considered, however, I believe analysts are somewhat bullish on the prospects of annual EPS growth over the next five years being 316 bps more than what it is in the preceding five years. This raises the risk of negative "earnings surprises" that could send multiples down to historical norms.
News Corp (NASDAQ: NWS) Not Worth Uncertainty
At 12.2x forward earnings, News Corp appears to be reasonably priced. However, over the last five years, earnings have fallen by 15.3% annually. While the firm has done reasonably well by staying on lucrative online mediums and away from print, ROA, ROE, and ROI are all in the low single digits. By contrast, more diversified entertainment companies, like Disney and CBS, are able to generate double-digit return metrics, so I do not believe that News Corp is compelling from a risk/reward standpoint.
Two large public pension funds are pushing for Rupert Murdoch to step down from the role of Chairman. While Murdoch has presided over a weak period in business, his absence won't be a panacea for poor fundamentals. Moreover, Murdoch controls around two-fifths of the voting shares, so any "catalyst" that is being factored in from his presumed departure is inflating the stock. With a forecast for 15.9% annual EPS growth over the next five years, I also believe the bar has been set too high. Accordingly, I recommend holding out and opting for stabler peers.
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