3 TV Stocks to Watch Closely

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

In show business everybody wants to be under the spotlight, not just actors. As higher ratings means higher revenues, media companies compete hard to outperform their peers. Entertainment firms like Discovery Communications (NASDAQ: DISCA), Scripps (NYSE: SNI) and CBS (NYSE: CBS) certainly know a thing or two about delivering highly sought-after TV content, yet face different prospects and growth opportunities. Let’s take a closer look at them and see if they could entertain you portfolio.

Discovering the world

Discovery Communications is an American world-renowned entertainment company, which owns the popular Discovery Channel, Animal Planet and The Learning Channel among other cable networks. The firm holds a vast content portfolio and has a remarkable track record of producing inexpensive and remarkably profitable television content that has a global appeal.

The company’s recent move towards reality-based programming granted Discovery a record in domestic viewership, and with domestic and international revenues increasing, the company’s stock has surged 62% during the last 12 months. Discovery trades at $81 or 32.8 times its earnings, at a 44% premium to the industry average, but offers industry-leading margins. Is it a buy? I’d consider it is.

My case rests on the international growth the firm has, and should continue to experience. Although domestic pay-TV penetration is very high, the international pay-TV market is not yet mature and holds enormous growth potential for the next decade, especially in emerging markets where pay-TV penetration is well below 50% (for example, Brazil). Discovery, who managed to establish its networks on concentrated international pay-TV platforms a long time ago, is more than well positioned to benefit from this growth.

On the downside, my immediate concern regarding Discovery is that advertising represents about half of the firm’s revenue, a higher proportion than some of its peers. This means that Discovery’s revenue is very sensitive to any economic slowdown or pullback in ad spending that may take place in the near future.

What a lifestyle

Scripps is an American media company focused on lifestyle content. The company’s cable networks include Home & Garden Television and Food Network, which combine to generate about two thirds of the firm’s revenue and hold a wide and loyal audience in the domestic market. With relatively inexpensive programming compared to its peers, and particularly attractive to advertisers (due to the economic position of its audience), Scripps’ flagship networks are remarkably profitable, generating estimated EBITDA margins well beyond 50%.

Trading at $71 or 15.9 times its earnings, Scripps’ shares have gained over 20% during 2013 and offer industry leading margins and returns. My take? This is definitely a stock to watch.

The company’s last reported quarterly results beat analyst estimates thanks to substantial growth in advertising and affiliate-fee revenue — up 10% and 8.5% year-over-year, respectively. Both sources of revenues are expected to remain healthy in the near future, particularly affiliate-fees. The appearance of new players in the video distribution market (like telecom companies Verizon and AT&T) should give more bargaining power to owners of popular pay-TV content when negotiating affiliate fees with cable and satellite companies.

As with Discovery, my concern about the company is that an enormous percentage of its revenue (in this case, approximately 70%) derive from marketing and advertising, making Scripps particularly sensitive to macroeconomic conditions or changing trends in ad spending. In addition, it should be mentioned that unlike many of its peers Scripps has yet been unable to grow in the international market.

Pretty popular

CBS is a mass-media conglomerate focused on the TV, radio and billboard businesses. CBS’s Television Studios and Television Network are the backbone of the company with a strong track record of generating hit TV-shows and holding industry-leading audience ratings for the past 10 years.

Its broadcast network reach and chart-topping ratings have made it extremely attractive to advertisers, who value CBS’ success and stability. Similar is the case for TV writers and producers, who see this popular network as a great place to launch their new shows.

Beyond advertising, the firm has developed several windows to monetize its popular programs after their original airing, which include strategic deals with fast-growing streaming companies (Netflix, Hulu, Amazon). This is currently benefiting CBS, as its first quarter results reported a strong double-digit growth in streaming revenue that boosted its bottom-line. In addition, I should point out a fact often overlooked: the firm is benefiting financially from the advance of pay-TV as it offers syndication rights to major cable networks (like TNT or TBS) for re-runs of its programming.

Having soared over 55% during the last year, CBS trades at $52 or 20 times its earnings, a premium to both the industry average and the S&P 500’s. Although the firm looks solid, I would wait for a more attractive entry point to become available before chipping in.

Bottom line

Although these three firms have been performing well lately, my long-term bet here is on Discovery. With solid international growth opportunities ahead, increasing domestic viewership ratings, and a strong track record of producing popular (yet inexpensive) TV content, this is a company worth considering if you fancy investing in the entertainment industry.

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Victor Selva has no position in any stocks mentioned. The Motley Fool recommends Scripps Networks Interactive. 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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