3 Media Stocks Facing Changes

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Technology is changing the media environment, calling different business models into question. The newspaper business is just one example: chances are, nowadays, most of you read them online (and for free). News Corp. (NASDAQ: NWSA), Grupo Televisa (NYSE: TV) and Viacom (NASDAQ: VIAB) are three media giants that are playing (and struggling) in this shifting field. Let’s take a look at them in order to determine if they still have some growth potential left in them.

Got news?

The new News Corp. is multinational media firm focused on the publishing business. The company formed after the recent split of the former News Corp., which left 21st Century Fox with its entertainment assets, and News Corp. with its newspapers and publishers, plus a few non-related Australian assets.

With the newspaper industry facing structural headwinds, News Corp.’s overall long-term prospects don’t appear particularly positive. Newspaper sales are declining as the overall news consumption behavior changes in favor of free online media. Advertising dollars have also been moving from traditional newspapers to online platforms for over a decade, a tendency that is likely to continue. It should be mentioned that News Corp. has a strong market share in the U.K. and Australian newspaper markets, which face the same headwinds.

Yet, as we said, the firm has more assets than newspapers, and these hold better growth prospects. News Corp. owns 61% of the RED group, a major player in the Australian online real estate classified market, and 50% of Foxtel, Australia’s only pay-TV provider. With both businesses expected to do well in the near term, they could help compensate for the expected sales decline in News Corp.’s newspaper business.

News Corp. trades at $15, or 0.5 its book value, a 76% discount to the industry average. The firm may have media wizard Rupert Murdoch as chairman, but most of the company’s entities lack economic moats and offer slow growth in the horizon. My take? I wouldn’t rush on buying.

Viva la tele!

Mexico’s Grupo Televisa is the largest media company in the Spanish-speaking world. The firm’s huge market-share in broadcast and pay TV provides it with a wide economic moat, as it has created significant barriers to entry for other companies.

TV broadcast operations are the backbone of the firm, accounting for almost 50% of its overall operating profit and consistently achieving EBITDA margins of over 45%. Televisa owns and manages four TV stations in Mexico City (and many repeater stations across the country), an impressive figure taking into account that TV Azteca, its major rival, holds just two. More importantly: Televisa’s stations are extremely popular, and with 70% of average prime-time audience share, they are extremely popular for advertisers. At the same time, the Mexican pay-TV market, where the company is a key player, is still quite young (current pay-TV penetration is below 50%), which offers substantial opportunities for future growth.

On the downside, I should point out that although the company has benefited from a rather benign regulatory environment, Mexico’s new telecommunications reform bill may affect Televisa’s broadcasting market share if the newly formed regulator (Federal Telecommunications Institute) requires the firm to disinvest or grant licenses to new entrants.

Televisa trades at $26, or 27.9 times its earnings, a 53% premium to the industry average, and offers a 0.51% yield. The firm’s second-quarter results were better than expected, with net income increasing 23.9% year over year and a declining debt-to-capitalization ratio. It doesn’t look cheap right now, but it certainly has growth potential.

To stream or not to stream

Viacom is a leading American entertainment company focused primarily on cable television and cinema. Its media networks, which include Nickelodeon, MTV and BET, are the backbone of the company, accounting for over 70% of firm’s total revenue in the first half of fiscal 2013. The company’s film studio, Paramount Pictures, may have had some misses lately, but it has a solid content portfolio and a strong movie pipeline scheduled for the rest of fiscal 2013. Moreover, Paramount is about to launch its own animation studio, with forecasts still uncertain.

Nickelodeon, the firm’s cash cow, is immensely popular among kids, and despite increasing competition — not only from Disney, its main rival, but from emerging players such as The Hub — it has managed to increase its audience rating this year. The MTV network, a major player in the teen-TV category, has also been generating strong cash-flow margins. Yet, this network faces stronger competition and its audience appears to have been declining over the last five years.

The company has made highly lucrative deals with online-streaming companies (like Netflux and Hulu), which have improved its bottom line. However, it is uncertain how these deals may turn out for the company in the long run. Streaming companies can certainly become a threat to TV operators, therefore hurting Viacom’s affiliate fees (currently, about one-third of cable network revenues); or they could affect its own cable network audience ratings, and therefore its advertising revenue.

Viacom trades at $73, or 17.7 times its earnings, a slight discount to the industry average, and offers a 1.54% yield. Should you buy? Viacom is mainly a content-producing company. How the firm adapts to this changing environment should determine its long-term prospects.

Bottom line

In business, like in nature, those who adapt, survive. With the playing field being constantly shaken by technology, media companies need to stay smart. And the same should be said about investors. My take? I would go for Viacom for the short term, and watch Televisa closely in order to chip in if an attractive entry point becomes available.


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