2 Winning Media Stocks to Buy Now

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

With live TV ratings down across nearly all of the major media producers, it is critical that entertainment diversify more in Internet and mobile mediums. This article will focus on what Disney and CBS are doing to target this secular transition, as well as my view on whether they are strong investments right now.

Disney (NYSE: DIS): "Buy"

After acquiring Lucasfilm for ~$4 Billion, Disney is now looking to cut jobs and internal expenses, explaining that they are no longer needed as new technology covers everything previously done by those employees. Disney is now the least profitable company of the “big four” in entertainment, mostly because of the rising cost of sports rights and moribund home video sales--hence, the importance of improving margins. Disney Interactive Studios, one of Disney’s subsidiaries that develops online games, lost a reported $758 million in the past three years. Further cuts in jobs are expected in all divisions, studio, game and music to compensate for the losses.

Nevertheless, Mickey Mouse’s home company had a successful FY 2012 with an 18% increase in profits, at $42.3 billion revenue in September. It also secured top contracts that target rising demand in streaming. Netflix will pay around $350 million annually in a partnership to stream Disney’s new on-demand movies onto tablets, smartphones and PCs. In other deals, Disney signed a multi-year agreement with Charter Communications to broadcast Disney’s latest content on sports, news and entertainment, both home and mobile.

At only a respective 16.7x and 13.6x past and forward earnings, Disney looks reasonably priced. It is forecasted for 12.4% annual EPS growth over the next five years, double what was achieved during the past five years. So, there is some concern about execution and negative surprises. However, four of the past five reported quarters have come out ahead of expectations, and did so by an average of 8%.

CBS (NYSE: CBS): "Buy"

In 2013, CBS will rely on Hulu to address the loss of live TV viewers (10% between the ages of 18 and 49) moving towards online and mobile options. They’ve signed an agreement for CBS’s content to be streamed to Hulu Plus users beginning this year. It recently announced that advertising slots for the Super Bowl sold out with 30-second commercials going for as high as $4 million. Now that the halftime show will be open to live streaming for the first time, CBS has an opportunity to bring in even more revenue. But, due to the firm's top ratings, the company is less reliant on advertising than their competitors are, which allows the company to focus more on their programs and airings.

Over the last six months, the stock has gained nearly 30% in value, outperforming the return on the S&P 500 by around 1,950 bps. At a 17.9x past earnings, the stock looks relatively expensive. So, let's compare it to a peer: Comcast (NASDAQ: CMCSA).

Comcast trades even higher: 18.4x past earnings. It has been on an incredible bull run over the past few years and is now at its 52-week high valuation of $105 billion, having risen 62% from the lows. Free cash flow generation relative to market cap is also reasonable at 6.8%. So, Comcast and CBS have delivered incredible momentum, but CBS is cheaper on a multiples basis. Is this justified? In my view, it is not. Over the last five quarters, Comcast beat expectations only 3 times and even had a miss of 17.5% in 3Q11. By contrast, CBS beat expectations in all five quarters and did so by an average of nearly 12%. I therefore encourage preferentially buying shares of CBS to capitalize off of the firm's inroads into Internet and mobile channels and limited downside.


TakeoverAnalyst has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of 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. This article was written by the staff of TakeoverAnalyst, which does not intend on opening a position in the next 48 hours.

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