1 Media Stock That Will Disappoint, 1 Bull Run That Will Continue

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

Over the last few months, some of the largest media companies out there--Disney, Time Warner, Comcast, CBS, and SiriusXM, among others--have seen fantastic returns. We are talking about high double-digit returns of 40% or higher. Could this bull run be expected to continue, and, if not, are the fundamentals enough to justify at least in-line market performance. This and more, below.

Comcast (NASDAQ: CMCSA): Could This Stock Disappoint?

Comcast is a global leader in entertainment and communication. The company announced that it is going to hold a conference call on of Feb. 13 to announce fourth quarter and fiscal year results. A good way to see what is at stake is to look at what kind of expectations the company has set up for itself...

In the third quarter of 2012 Comcast’s cable business performed extremely well. Revenues in this quarter rose by 15.4% to reach the $16.5 billion mark. Operating cash flow was $5.0 billion and this represented a 9.5% increase. The operating income stood at $3.0 billion, which represented a 15.4% increase compared to the previous year. For the nine month period, revenue was $46.6 billion--a 14.3% increase compared to the previous fiscal year. Strong corporate execution has been reflected in stockholder gains--11.2% over the last 4 months. And, in general, the stock has gone up and up over the last 12 months--gaining more than 60% in value. So, clearly, investors have come to expect a lot from Comcast.

And Comcast has also been very generous with its shareholders in regard to payouts. In the recent quarter, the company paid dividends worth $435 million and spent some $750 million in share repurchase--a combined 1.1% of its shareholder value. These results are strong evidence that Comcast is actually performing well and is a worthy investment.

All of this, however, has set the company up for a major disappointment. The bar has been set so high that there is little upward potential in the short-term. The stock now trades at a respective 18.4x and 18.1x past and forward earnings. While it may have double-digit momentum and a very "strong buy" consensus on the Street, the stock is trading significantly higher than peers.

Why CBS's (NYSE: CBS) Bull Run Has Yet To Die

CBS, for example, is only valued at 13.9x forward earnings. It is forecasted for 14% annual EPS growth over the next 5 years. Assuming expectations are met, 2016 EPS will come out to $4.31. At a multiple of 15x, this translates to a future stock value of $64.55. This provides for a little over 13% average annual returns when you factor in dividend distributions.

It is particularly interesting to note that, in the span of four years, the EBITDA value has grown by 27%. It is most interesting to note that in this span of four years, the company’s stock grew by more than 500%. CBS has had a healthy financial growth over the years. It has managed to achieve a 14.1% return on capital from 2010 to 2012. This is complemented by strong cash flow of 8.6%, which could expand to 13.3% in 2013 onwards.

However, the company is still facing competition from others in the industry. The greatest challenge that the company faces is that of a decline in live viewers who are an important part of its revenue generation. One of the strategies that CBS has currently adopted is uniting with Hulu in providing content to Hulu Plus subscribers. It is this kind of strong focus on reaching out to next-generation media platforms that I believe makes CBS a relatively safe media investment.

I also believe that investors will come to equilibrate the company's multiples with that of Time Warner (NYSE: TWC). Time Warner hasn't been making as aggressive investments in social media, and yet its forward earnings multiple is at a premium. This also can't be explained by growth, since CBS is expected to grow by a rate that is more than 50 bps faster over the next 5 years. While CBS is actually at a premium in terms of the PE multiple, firms are valued based on the future. Buying now under the expectation that forward multiples will, at the very least, equilibrate is sensible move. If nothing else, I encourage buying stakes in both firms.

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