Grupo Televisa (NYSE:TV), the Spanish-language cable TV, satellite pay-TV provider and content producer has had better days. But TV stock still looks somewhat overvalued especially compared with its U.S. peers, despite its continuing growth.
Don’t get me wrong here. TV stock still provides great net income and cash flow. In fact, its recently released second-quarter earnings report showed that its latest net income grew 57.5% over last year.
But its overall valuation is still high compared to its U.S. counterparts in the cable TV and content production businesses.
Understanding Televisa’s Underlying Income
Grupo Televisa likes to break down its earnings into what it calls Operating Segment Income (OSI) to measure its underlying business performance. OSI strips out corporate expenses and more important huge depreciation and amortization expenses.
U.S. companies like Discovery (NASDAQ:DISCA), which also has Spanish-language programming, do the same thing. However, they call their underlying operating income “OIBDA,” or Operating Income Before Depreciation and Amortization.
But here is the thing. Televisa’s OSI has much lower margins, or operating income as a percent of sales, than Discovery’s OIBDA margins. For example, Televisa made OSI margins of 35.8%, down from 38.9% last year.
By contrast, Discovery made OIBDA margins of 44.3% in Q2, compared to 42.9% last year. In other words, its margins not only increased, but are substantially higher than Televisa’s. Well it is fair to say that in some ways this is comparing apples to oranges, I think my point still stands.
Here is what that boils down to. Grupo Televisa has had a higher deterioration in its advertising revenue and income related to that revenue than Discovery. Moreover, royalties from Televisa’s content and subscriptions do not make up for that lower ad revenue and margins, on a relatively comparable basis.
The reason I compare these margins is due to the fact that DISCA stock is much cheaper than TV stock.
Comparing Valuations With Televisa
Here is a simple way to look at the two companies. Televisa has a market value of $3.6 billion but quarterly revenues of $1.03 billion, or $4.12 billion annualized. This implies a price-sale multiple of 0.8 times.
However, Discovery stock has a market value of $10.2 billion, and its latest quarterly revenue was $2.54 billion, or $10.2 billion annualized. That puts DISCA stock on a multiple of 1.4 times sales.
Therefore, using this measure, TV stock is much cheaper.
However, on an operating income yield basis, Televisa is valued the same as Discovery. Televisa made an annualized operation income of $1.6 billion during Q2, or 43.5% of its market value. By contrast, Discovery made $4.5 billion annualized this past quarter.
That represents a yield of 44.2% on its market value. In other words, the two stocks are close in valuation here. Televisa has an operating income yield of 43.5% against Discovery’s 44.2%.
But Televisa has significantly lower operating margins. It should not have the same high yield as Discovery. But TV stock is still valued about the same on a yield basis as Discovery. That means on a yield basis, TV stock, after adjusting for margins, is priced too high.
What Should You Do With TV Stock?
Sometimes the best way to understand a stock is to compare it with another company in its industry. I have done that here with Televisa and Discovery. Discovery also has Spanish-language programming and channels.
Both companies are profitable and have not had huge declines in revenue. But Televisa is too expensive compared to Discovery in terms of its operating income yield.
And that is important because Televisa goes to great lengths, especially in its Q2 slide presentation, to discuss its underlying operating earnings.
TV stock is up about 14% so far this month since it presented its Q2 earnings. However, for the year and year-to-date, the stock is still negative. Therefore, I would look for an opportunity to buy TV stock when it dips again.