GfK, one of the world’s largest market research firms, has come out with some very telling stats about the viewing habits of Netflix (NFLX) users and other video streaming services. It seems that subscribers of these types of services watch more TV shows than movies.
Strategy Analytics estimates that internet-delivered video in North America is expected to hit $18 billion annually by 2019, exceeding those of movie theaters and DVDs. While this is really bad news for DVDs, it’s great news for content producers who specialize in TV shows such as House of Cards and Breaking Bad.
What does this mean for investors?
Well, it means that the stocks benefiting most directly from TV shows (i.e., cable networks that produce TV series) are going to see more revenue growth in the next few years than movie studios.
That being the case, these three media stocks will likely do better than most over the next 12-24 months. Content, more than ever, is still king:
Media Stocks — AMC Networks (AMCX)
When it comes to viewership, AMC Networks (AMCX) had the biggest year-over-year increase in 2013, up 32% in the important 18-49 age category. No other network came anywhere close. With Breaking Bad, The Walking Dead and Mad Men leading the charge (both top 10 on Netflix), the future looks bright for this particular media stock.
We all know how fickle the TV business can be, but for the time being business looks great. On August 7, it reported second-quarter results that include 38% increase in net revenue to $522 million and adjusted operating cash flow (AOCF) of $157 million, 14% higher than a year earlier.
Especially helpful was its international business, which saw net revenues increase 831% in Q2 thanks to its February 2014 acquisition of Chellomedia for $1 billion. Formerly part of Liberty Global (LBTYA), the additional channels gives AMCX access to 138 countries and 390 million homes.
I really like that AMCX focuses primarily on TV shows with less emphasis placed on movies, which are even harder to make money on. Down 20% from its April high, AMCX hasn’t traded this low since early 2013. When it comes to media stocks, AMCX is my favorite buy due to its decline year-to-date in 2014.
Media Stocks — Discovery Communications (DISCA)
Oprah Winfrey’s cable network (OWN) continues to make strides when it comes to making money for Discovery Communications (DISCA), a 50% owner of the network. (Winfrey’s Harpo Inc. owns the other half.)
In the second-quarter conference call CFO Andrew Warren noted that OWN repaid $20 million to Discovery in the quarter and contributed $8 million in net income, a $15 million improvement over the same period last year.
While OWN still owes DISCA $461 million, it has been paying back portions of the outstanding debt since 2013, showing that its cash flow is coming on. And OWN is just a tiny part of Discovery.
David Zaslav’s strategy for DISCA is based on four key principles:
- Invest in lots of great content for all screens. By tripling its investment in content over the past seven years it’s been able to increase U.S. and international viewership by 53% and 200% respectively.
- Focus on advertising. DISCA has been able to build more new brands since Zaslav took over seven years ago than any other media company. In some instances it has rebranded networks, as with Destination America, which used to be Planet Green. For others, such as OWN, it has created an entirely new network.
- Grow internationally. Discovery generates more than half its revenue outside of the U.S. In May, it acquired an additional 31% of Eurosport, the world’s number one Pay-TV programmer of sports, giving it majority control.
- Grow market share across all of its international markets. Take the purchase of Eurosport. It allows Discovery to roll out sports programming across 70 countries where it already has networks, providing the company with significant advertising opportunities it previously might have been unable to achieve.
If you’re looking for larger, more stable media stocks than AMCX, DISCA would be my next choice.
Media Stocks — Disney (DIS)
Although it’s a hybrid, I have to go with Disney, which owns 100% of three cable networks including Disney Channel, ABC Family, and SOAPnet.
DIS also holds an 80% interest in ESPN (20% owned by Hearst Corporation) and A&E Television Networks (a 50/50 joint venture also with Hearst). Together, these interests generated $5.8 billion in operating income in the nine months ended June 28, 2014 — 57% of Disney’s total operating profits.
To say that the cable networks are vital to Disney’s success is an understatement. Interestingly, ESPN, which is considered the gem in its cable network properties, had a very underwhelming Q3 due to higher programming costs for baseball and the World Cup. As a result, the cable networks experienced a 7% decline in operating income in the third quarter — down to to $1.9 billion with just a 1% increase in revenues to $3.9 billion.
But that’s the beauty of Disney.
While its cable networks and broadcasting segment had a very mediocre quarter in terms of profits, its four other segments saw operating earnings increase by 49% to $1.6 billion. Like a very good baseball team, enough of its pieces were firing on all cylinders in Q3 to deliver results that were more than satisfactory.
Bob Iger has Disney performing at a very high level, sending DIS stock up 45% over the past year. As media stocks go, this one is your best bet if you want exposure to cable with the safety of some diversification.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.