Pros & Cons To 3 Media Stock Investments
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If you are looking to invest in media, I recommend diversifying across the sector--buying everything from cable providers to broadcasters. In particular, I encourage being cognizant about secular transitions in media and whether these are tailwinds or headwinds for the concerned company. In addition, it is important to track how the company's valuation compares to the competition in light of takeover activity. Below, I review 3 media stocks with these considerations in mind.
Pros & Cons To A Cablevision (NYSE: CVC) Investment
Cablevision's stock price has been on a relentless decline; from missing expectations to margin erosion and voice subscriber losses. I have been saying for some time now that the Dolan family, which heads the business, will try yet again to take the firm private. The company has expressed interested in strategic alternatives and in mid-November even hired Citi and JPMorgan to find buyers for Bresnan Broadband, which Cablevision bought just 2 years ago for $1.37 billion. A few analysts have speculated that this will begin a larger breakup of the company.
There are several reasons to be optimistic about Cablevision beyond the M&A upside. First, it has struck content agreements with both Disney and CBS in recent months. In the former deal, Disney will supply content--noteworthily, ESPN3 and ESPN 3D--to Cablevision customers across several mediums, including smartphones and tables. In the latter deal, CBS will provide uninterrupted shows. With a return on capital of 14.1% (more than 200 bps above the industry average), Cablevision is also creating value. Profit margins are also 400 bps below peers, so there is room for improvement.
On the other hand, cord-cutting by cable TV buyers is becoming more of a secular problem with the rise of online, often free, streaming content. Data suggest that it is not as isolated of an issue as originally anticipated. At a respective 22.1x and 17.5x past and forward earnings, the company is also expensive compared to peers. Perhaps this is the reason why only 8 of the 23 reporting analysts rate the stock a "buy" or better.
In my view, CBS is a more attractive investment than News Corp is. They are both around the same price at 12.4x forward earnings and both have roughly the same 5-year annual growth forecast (14.1%). The difference comes through the fundamentals.
Though CBS's core business faces a secular headwind from growing Internet options (and this can be seen in the decline in live TV show viewers), management has taken multiple steps to address the issue. From signing an agreement with Hulu to distribute content beginning next year to re-pricing content to confront the changing advertising environment, CBS has been quick to take action. It is also looking to do more retransmission consent and reverse compensation business, as well as programming deals with third-parties, like Amazon and Netflix. Others have speculated that the company will acquire Dick Clark Productions for around $350 million, which will provide the company with event programming--an area where CBS has much success--that can be leveraged for more retransmission revenue. All told, achieving the revenue target is tracking around a year ahead of expectations.
Despite expectations that the split into two would occur by the end of this year, News Corp recently suggested that this will have to wait until June 2013. Furthermore, I find that the company's decision to buy 49% of YES Network for between 15x and 19x EBITDA (19x if the company exercises its right to acquire 80% of the business), came at too great of a price. If it bought the company at a fair valuation, ESPN should be worth $66 billion. Now, Disney, as a whole, is worth only $87.3 billion and less than half (46%) of the company's revenue in 2011 came from Media Networks, which include Disney Channel and ABC Television Group in addition to ESPN. The core broadcasting business, however, is declining with average primetime ratings down more than 10% for Fox in the target market. A free cash flow yield of less than 5.5% also makes me pessimistic that the upside has already been factored into the stock price, which has risen around 50% from the 52-week low and is now at around the 52-week high.
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