A Look At Diversified Media Stocks

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

Media can be highly uncertain, but there's one trend that has nearly everyone optimistic: digital. Content producers are looking to find more and more inroads into media that can be streamed or viewed through tablets and smartphones. Roughly half or more of US mobile phone owners have smartphones, and I believe that within the next 5 years that number will be closer to 90%. It is thus never too late for the companies to enter this segment. With that said, media will always be diversified. In this article, I look at several media companies with differing market exposure.

Buy Lions Gate (NYSE: LGF), Hedge With This Safer Pick

Over the last 12 months, Lions Gate has been on a bull run--roughly doubling in value. What's particularly interesting is that Lions Gate is principally in the motion pictures industry with 14 theatrical titles released for FY2012. This area of media has been particularly hard hit in recent years--theater attendance has declined for two straight years, although it is projected for a reversal with a 5.6% gain this year. Despite the terrific run, shares are still priced attractively at 11.5x forward earnings. Analysts rate the stock a 1.8 out of 5 where "1" is a buy, and the latest report by Barrington Research puts the target at $21, which is a 32%+ premium to the prevailing price.

There are several reasons to be optimistic about Lions Gate. First, I like its investments into social media. It owns 42% of Break Media, which is the biggest creator of online content targeting males. It has an audience of 200 million viewers, which it reaches out to through men's lifestyle sites, humor, gaming, and, excitingly, mobile video apps. The latest investment by Time Warner in competitor Maker Studios suggests rising interest in digital media. It has also helped limit the downside with a streak of popular releases this year, particularly Twilight, which had a much better global debut than anticipated. It has also monetized past film successes, like The Hunger Games, through strong video sales.

If you are afraid that Lions Gate peaked, I encourage buying shares of Viacom (NASDAQ: VIAB), which is more diversified beyond motion pictures and is engaged in producing more television content: MTV, BET, Nickelodeon, Spike, VH1, Comedy Central, etc. These provide for much more stable streams of income than Lions Gate's core focus on films. And at a respective 12.2x and 9.8x past and forward earnings, Viacom is attractive. It is forecasted for 14.6% annual EPS growth over the next 5 years. When you factor in the 2.1% dividend yield and margin expansion off of a 0.83x PEG ratio, reward far outweighs risk.

A "Fair & Balanced" Look At News Corp (NASDAQ: NWS)

This major media company is even more diversified than Viacom. It will break up by around June 2013--one, a publishing business; the other, a media & entertainment business. The former will keep the "News Corp" name while the latter will receive a new name, "Fox Group." Of these two, I believe that Fox Group has structurally better risk/reward--and not because of the "phone hacking" scandal. The newspaper business is on a relentless decline, and I don't expect the story to get much better going forward. With the increasing popularity of smartphones and tablets, media consumers are looking more for digital entertainment content. But there are several reasons to be optimistic about the "New News Corp"…

News & information services generated $939 million in EBITDA for the 12 months ending 2Q12, and circulation & subscription actually saw sales increase $2 million over las year. In addition, the company looks positioned well in digital conversion with popular assets like Factiva, Dow Jones Newswire, MarketWatch, and AllThingsD, among many others.

For Fox Group, the main downside comes from reckless acquisitions. The 49% interest--with exercisable rights to 80%--in YES Network, for example, came at way too high of a price tag, as evidenced by how it implies a $66 billion valuation for ESPN when Disney is only worth $88.4 billion. Average prime time ratings for 18-49 year olds has also declined more than 10% for Fox. But there are still more stable monetization opportunities from cross-selling brands on one platform to the next.  The company is looking to do more video-on-demand services and HD versions that will boost digital sales and momentum.

Analysts forecast News Corp to grow EPS by 14.5% annually over the next 5 years. Assuming expectations are met, 2016 EPS will come out to nearly $3. At a multiple of 15x, this translates to a future stock value of $45. Discounting backwards by 10% implies that the firm is roughly fairly valued. Deutsche Bank and Canaccord Genuity, however, are still optimistic with their "buy" ratings and respective $29 and $30 price targets.


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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