3 Undervalued Media Stocks to Buy

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

Though the media business can be very unpredictable, there are stable companies out there. These businesses are well diversified, yet aggressive in their growth strategies. Then there are media businesses that are the takeover targets and have substantial value to create for suitors. I recommend investing in a basket of these different stocks to mitigate risk while keeping upside high.

CBS (NYSE: CBS), Disney (NYSE: DIS) Both Winners

Over the last 12 months, CBS' stock has gained 39.2% in value. The battle between CBS and Disney has gone up and down, with a return of 34.5% from Disney over the same time period. Going forward, the main problem these media businesses have is in their core businesses: competition from on-demand media and the wide variety of easily accessible Internet media. Fortunately, both firms are widely diversified to hedge against this risk. And in terms of value, I find Disney to be slightly more compelling.

Though CBS trades at only 14.9x past earnings versus 15.3x for Disney, the latter offers greater free cash flow momentum. Over the past 8 years, CBS's FCF has fallen from around $3.3 billion to $1.3 billion, or a 5.9% yield, today. By contrast, Disney has seen FCF increase by a CAGR of 8.1% to a yield of 4.9% today. Given that Disney started from a larger earnings base, this growth out-performance is particularly noteworthy. Both companies have nevertheless done well of late, with CBS beating expectations in all of the last 5 quarters and Disney beating expectations four times (the recent quarter was in-line).

CBS has delivered terrific record-breaking results, and, fortunately, more and more business is coming from unstable non-advertising sources. In the most recent quarter, 44% of business came from non-advertising sources--a major leap from under 30% a few years ago. Retransmission deals with Cablevision, AT&T, and DISH cover two-fifths of the company's TV stations and have clearly paid dividends. Streaming deals with Hulu Plus and Netflix International have also reduced downside from a secular transition towards Internet-based media.

And I also like the steps that Disney is taking to secure value. The acquisition of Lucasfilm will generate substantial revenue synergies, since Disney has a strong platform from which to cross-promote Star Wars. Ever since the takeover of Miramax in 1993, the company has been aggressive in increasing scale. As any stock chart will tell you, the results have been strong. ABC, Pixar, Marvel--all winners. I expect Lucasfilm to be the same.

SiriusXM (NASDAQ: SIRI) Still Hot

Sirius is a controversial stock--everyone seems to have an opinion on it. I have been bullish on it for some time, and this call has been supported by the 51.7% bull run over the last 12 months. Since Liberty Media (NASDAQ: STRZA) will be taking over the company in a matter of weeks, you may want to consider backing Liberty to continue your investment. Auto sales have been hit from Hurricane Sandy going into the fourth quarter, but the long-term trends look bright with profit margins expanding and subscribers increasing. 

Liberty Media is still buying shares at a premium, which basically sets a floor on the downside. Liberty will also undertake a massive share buyback plan that will drive tremendous value creation. Morgan Stanley seems to agree, and now calls the company a $3 stock.

In regard to competition from Pandora, I believe SiriusXM is safe as the market leader. Pandora can't replicate the momentum that Sirius is experiencing in car sales, but Sirius can easily take Pandora's music business. Once the Liberty Media integration is completed, the resulting company will be in a stronger financial position to expand into related markets. Liberty Media, after all, owns Starz, which was a major content library that Netflix lost. So, cross-selling opportunities are substantial to make diversification more than just a way to hedge against isolated market volatility. Accordingly, I encourage buying shares in Liberty and Sirius.


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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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