1 Takeover Target In Media & 1 Stable "Winner"

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

Media is often known for unpredictable underlying fundamentals. Consumers tend to be very fickle and move from one show to the next. For this reason, I recommend diversifying across cable and broadcasters if you are bullish on the sector as a whole. There is exceptional potential in terms of innovation, passive income steams, and even buyouts. Below, I focus on 2 key stocks with differing risks and rewards.

Cablevision Systems (NYSE: CVC) Looking For Suitors

For over a year, Cablevision has been the subject of many a takeover rumor. Its majority shareholders have twice tried to take the company private, and it is now receiving several bids for its most lucrative assets. In recent days, it has received bids from Suddenlink, Time Warner (NYSE: TWC), and Charter for its Optimum West / Bresnan broadband cable service. Optimum West was originally purchased at $1.37 billion, which represents 35% of Cablevision's market cap today. Originally, management said it was not interested in divesting Optimum West but, after seeing the bids, it now apparently is. It is consulting with Citi and JPMorgan to get the highest price.

Optimum West is a meaningful catalyst. Its average revenue per video subscriber has risen $12 to $141.19 in the third quarter. By contrast, Cablevision's overall revenue per video subscriber rose only $3.12 to $154.83 over the same time period. That said, there are other reasons to be optimistic about Cablevision as a whole. Optimum Video has signed deals with ESPN and Disney networks, CBS, NFL, NBC, and other top content providers to dramatically improve on-demand and live options for subscribers. And more than twice the data flowing through the WiFi networks in 2011 has flowed through the networks this year. Optimum Online net additions grew around 70% in the third quarter and were reinforced by the 47,000 Optimum WiFi hotspots that held up well despite the widely-reported weather storms.

On the other hand, free cash flow has been on the decline: -9% in the third quarter. It trades at 18x forward earnings and is forecasted for 10.2% annual EPS growth over the next 5 years. Assuming expectations are met and a contraction to 16x past earnings, shareholders can expect an average annual return of 8% over the next 5 years with dividends factored in. This is not enough to warrant an investment in the company and, accordingly, I recommend avoiding. The one upside that I see comes from a larger-than-expected takeover of Optimum West by Time Warner. Time Warner trades at only 13.8x past earnings and is in need of a catalyst to attract investors after the stock has already risen so much. The company has $3.85 billion in cash, which is more than enough to successfully finance a deal with little interest burden.

Why You Should Buy Comcast (NASDAQ: CMCSA)

Comcast is a high quality alternative that is near its all-time high of a $100 billion market capitalization. The cable and broadcaster trades at 17x past earnings and is rated very favorably on the Street. 22 of 29 reporting analysts rate the stock a "buy" or better--10 of which say "strong buy." No analyst is calling the stock a "sell." And for good reason: the company is at around a 46% discount to the industry average P/B ratio.

There are several reasons why you should be optimistic about Comcast. First, it is on a very steep part of its growth curve. EPS grew by a rate of 16.3% over the last half decade. It is expected to grow by a 15.6% rate over the next 5 years. Fueling this growth is the company's sports programming business, (1) NBC Sports Network, and (2) investments in next-generation media. Comcast is a large part owner of Hulu, and Hulu is asking for $200 million to expand abroad. The online streaming company is divided between being ad-supported, subscription-based, or both. By the end of 2012, Hulu will reach 3 million paid subscribers and earn around $700 million, a 65% growth rate. 

NBC Sports Network recently signed a three-year $250 million deal that gained it broadcasting rights to the English Premier league soccer. I am particularly optimistic that shareholders will see upside through News Corp's 49% ownership of YES Network--a stake that was acquired at a 15x multiple and 19x if the news conglomerate exercises its right to an 80% stake. This is very evidently above Disney's ESPN's multiple, since it would imply a $66 billion valuation for the leading sports broadcaster (Disney, as a whole, is only worth $88.6 billion). Comcast should also see multiples appreciate when the implied YES Network deal comes at a 19x EBITDA, since Comcast, as a whole, only trades at 5x EBITDA. In light of the growth opportunities in sports broadcasting and next-generation media, I recommend adding Comcast to your media portfolio. 

TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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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