In August 2015, investors reacted rather severely to the seemingly disappointing earnings report of the Walt Disney Company (DIS). When it reported second-quarter earnings, analysts were surprised to learn that Disney’s highly popular sport channel, ESPN, actually lost subscribers during the period.
The losses were a shocker because ESPN had a very solid track record of subscriber growth and profits for Disney. It also stoked fears across the entire entertainment industry that the shift from traditional television viewing channels, such as cable and satellite TV, was really starting to accelerate to the Internet.
The funny thing is, in 2015 cable television actually reported some of its strongest subscriber growth in the past decade. Cable giant Comcast reported 89,000 new subscribers for its television services during the last quarter in 2015, and Time Warner Cable added 32,000 subscribers. These trends were modest at best, but still the best growth these companies reported in nearly a decade.
The media firms that focus on content, such as television programming, will benefit from this recent stability, and also have ample opportunity as content does shift online. Coupled with the erratic stock market behavior so far in 2016, there is bountiful opportunity to pick up the best firms in the space at bargain-basement levels.
Below are five media stocks that could entertain great gains in your portfolio as media trends fully evolve over the next couple of years.
5 Media Stocks to Entertain: Walt Disney Company (DIS)
Disney’s (DIS) surprising ESPN losses are viewed as the potential canary in the coal mine of the eventual shift to viewing television and movie content to the Internet. Netflix is benefitting greatly with rapid subscriber growth, but as noted above traditional viewing channels such as cable are holding their own and expected to do so moving forward. (Netflix is not a top media pick due to its sky-high valuation.)
Despite the uncertainty at ESPN, Disney has a reputation as being the best-managed media firm out there. CEO Robert Iger has made a string of savvy acquisitions, including the purchase of Lucasfilm, founded by Star Wars creator George Lucas. The purchase was for $4 billion and is a bona fide steal given the latest Star Wars film has generated half that amount in global box office receipts.
Disney’s appeal lies in its stellar growth trends and steady growth prospects. Analysts project sales growth in the mid-single digits in each of the next two years and total sales of nearly $60 billion by the end of fiscal 2017. The forward earnings multiple (P/E) isn’t a steal at 14.8, but quality is rarely cheap, and the multiple is actually lower than the S&P 500.
5 Media Stocks to Entertain: Time Warner (TWX)
Time Warner Inc (TWX) rivals Disney for the savvy moves its CEO has made in recent years. Jeffrey Bewkes has spun off Time Warner Cable to shareholders and also unloaded the slower-growing print publishing businesses into Time Inc (TIME).
What remains are the high-margin entertainment divisions, including Home Box Office (HBO), Warner Bros films, and cable channels including CNN, TNT, TBS, and Cartoon Network.
HBO has recently embarked on the HBO Now app that markets directly to consumers. By Time Warner’s estimations, it wins whether consumers stay true to cable, or migrate more suddenly to online viewing.
At a forward P/E of 11, Time Warner is arguably the value play in the space, but the company still has great growth prospects.
5 Media Stocks to Entertain: Twenty First Century Fox Inc (FOXA)
Twenty First Century Fox Inc (FOXA) is similar to Disney in that it is a globally diversified media blue chip. It created the Fox television network more or less out of thin air, and also owns the namesake movie studio business.
Media titan Rupert Murdoch remains executive chairman, and his son, James Rupert Murdoch, now runs Fox on a daily basis.
Fox is no longer growing briskly, but the forward P/E (for the year ending June 2017) is quite reasonable at just over 12. Analysts project modest sales growth over the next two years, but Fox has leadership positions in Asia and Europe that are less developed than in the United States.
5 Media Stocks to Entertain: Discovery Communications Inc. (DISCA)
Discovery Communications Inc. (DISCA) tends to fly below the radar of the three prior media juggernauts, but is worth a close look as a pure-play media content operator. It operates the namesake Discovery Channel, as well as TLC, Animal Planet and the Oprah Winfrey Network (OWN), which it co-owns with Oprah Winfrey herself.
Discovery boasts impressive profitability (operating margins above 30%) and has been growing briskly (average annual sales growth of 26% over the past decade). One thing that has been hitting the stock, in addition to the general industry concerns mentioned above, is that a lot of revenue comes from overseas. A strong dollar has been hurting the international results as they are translated back to U.S. dollars for financial reporting purposes.
Discovery’s forward P/E is just below 16, which is a great deal given its strong historical growth trends.
5 Media Stocks to Entertain: Liberty Global plc (LBTYK)
Given the steadier-than-expected trends in cable, it makes sense to recommend a traditional operator in the space. Liberty Global plc (LBTYK) provides broadband cable and internet in far flung locations including Europe, Chile, Puerto Rico, and other international locations.
Like Discovery, Liberty Global is getting hurt by the strong dollar. But reported revenue has grown 21% annually over the last three years, and the firm just announced it is purchasing Cable and Wireless Communications. Profitability trends are admittedly murkier, and the company is acquisitive with lots of debt. But this is a firm heavily influenced by cable titan John Malone, who has among the best reputations in the business for compounding capital for shareholders.
As of this writing, Ryan Fuhrmann was long shares of TWX, DISCB, and DISCA, but did not hold a position in any of the other aforementioned securities.