2 Diversified Media Stocks to Consider Buying

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The problem with investing in media many times is that the market is inherently unpredictable. Viewers can be very fickle, liking one type of genre one year and a totally different genre the next. While, of course, there is a wide range of demographics and interests to target, the same market targeted last year can only be seen as a dynamic, or ever-changing, cohort. Comcast and CBS have taken several strategies to adapt to the changing landscape of media. Both have managed to perform well financially.

Why You Should Buy Comcast (NASDAQ: CMCSA)

As a major producer of mass media, Comcast carries a wide economic moat. For example, it offers NBC television broadcasting, Internet services, and voice services; needless to say, the company is diversified. Comcast, however, is still looking to broaden even more through increasing the distribution of Crossings TV to Chicago, San Francisco, and Seattle in 2013. NBC recently entered into a sports programming deal with Comcast, wherein NBC can broadcast the English Premier League after signing a $250 million deal for three years. Over the last decade, there was a doubling of the return on equity and an almost triple return on capital to 7%. An increase in the high-speed customers led to a 30% profit increase in the first quarter of 2012. Clearly, we have that rare mixture of momentum and diversification with Comcast.

Comcast is also a 30% part owner of Hulu, which I like because it puts the company's foot in the door of next-generation media while not tangling every core segment into the new craze. While Netflix's CEO has been adamant about media going into the digital streaming direction, I don't believe it is a sure bet. At the end of the day, there's something nice about turning on the television screen and waiting for the next live program. But, for now, Hulu's momentum should keep investors glued to the upside. Hulu has 31 million viewers and 3 million paying subscribers. By the end of 2012, Hulu was expected to register a 65% growth by hitting the $700 million mark.

Elsewhere, Comcast is trying to acquire AT&T (NYSE: T) broadband, but AT&T has stood firm, saying that it is not for sale. With a strong amount of LTE coverage, AT&T is also a strong bet on the streaming market. It offers a 5.1% dividend yield and trades reasonably (13.9x earnings) for such a stable pick.  Analysts forecast the company's growth rate at 6.7%, which is just slightly higher than the five year average. When you factor in dividends and more data usage through streaming, AT&T will likely provide secure returns alongside Comcast.

CBS (NYSE: CBS): Pros & Cons

CBS is a commercial broadcasting network that started off largely as a radio network. In recent months, CBS has been struggling after the number of live viewers went down more than 10% due to competition from other online options. Popularity is especially declining fast for the 18-49 age brackets. Although CBS’s third quarter earnings increased from $338 million to $391 million while revenue also increased by 2% to hit the $3.4 billion mark, investors are now starting to have reservations over stability.

Like Comcast, CBS also has exposure to Hulu. It has recently agreed, for example, to discharge content to subscribers of Hulu Plus. This service is already underway as of 2013, and, if it fares well, investors will look more away from the deterioration of the core business. If anything, Hulu Plus content distribution should help reinforce the company's commercial broadcasting business through active promotions of exclusive television content. We also should be careful not to overstate the struggles of CBS's core business. CBS has, after all, a clean balance sheet and still maintains top ratings on its TV shows--both new and old. The company looks forward to $1 billion worth of reverse payments and retransmission fees by 2017.

And, fortunately, the company is less cyclical than peers, so it isn't as vulnerable to the competitive TV advertising market. At a respective 16.5x and 13.1x past and forward earnings, CBS looks reasonably priced. The industry average PE multiple is considerably higher at 19.8x for only a 180 bps-better return on invested capital capital of 11.8%. With an annual growth rate of 14% over the last five years (and expected over the next half decade), CBS can see its multiples decline by around 10% and still generate an average double-digit stock return when dividends are reinvested.


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