Six Top Telecom & Media Picks Following the AT&T-Time Warner Ruling

 | Jun 17, 2018 | 10:00 AM EDT
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With a favorable ruling for AT&T (T) in its proposed acquisition of Time Warner (TWX) , market attention will turn to other players with broadcasting, video and streaming operations. Six investment experts and contributors to look at other opportunities in the telecom and media space.

David Fried, The Buyback Letter

Liberty Global Plc (LBTYA) is the world's largest international TV and broadband company, with operations in 11 European countries under the consumer brands Virgin Media, Unitymedia, Telenet and UPC.

It invests in infrastructure, digital platforms and next-generation networks that connect 22 million customers subscribing to 46 million TV, broadband internet and telephone services. Liberty also serves 7 million mobile subscribers and offers Wi-Fi service through 12 million access points across its footprint.

In addition, Liberty Global owns 50% of VodafoneZiggo, a joint venture in the Netherlands with 4 million customers subscribing to 10 million fixed-line and 5 million mobile services, as well as significant investments in ITV, All3Media, ITI Neovision, Casa Systems, Lionsgate, the Formula E racing series and several regional sports networks.

The company has been wheeling and dealing. Liberty now expects its previously announced sale of UPC Austria for €1.9 billion to T-Mobile Austria to close in the second half of 2018. In March, the company also announced the termination of its planned purchase of Multimedia Polska.

And British wireless phone giant Vodafone  (VOD) is buying Liberty's European cable TV systems (Germany, Hungary, Romania and the Czech Republic) for some $22 billion.

Liberty Global is the largest multinational cable company in Europe, and following the sale of systems to Vodafone, Liberty Global will continue to be Europe's biggest multinational cable operator, with systems in United Kingdom, Ireland, Belgium, Switzerland, Poland and Slovakia.

That move is not without controversy, with other large players objecting, saying it would lead to excessive market concentration and monopoly. Liberty also invested in Cheddar, the financial news streaming service aimed at millennials, which is preparing to expand internationally and launch a channel on Snapchat Discover.

First-quarter results were sales of $4.16 billion (up 18.4% over the prior-year period), and operating cash flow of $1.90 billion (up 19.2% over the prior period).

After shedding assets, the U.K. and Ireland will account for over half of the company's revenue; the product offerings in these two countries are improving rapidly and Liberty Global hopes to effectively compete with next-generation TV service being expanded and strong broadband and voice products.

Management has not announced what it will do with cash from the asset sale. Perhaps a buying spree or a large buyback of shares? Shares outstanding have been reduced by 5.6% in the last 12 months.

Todd Shaver, BullMarket

Roku  (ROKU) makes devices that allow 21 million households to access streaming video content on conventional televisions, bringing content off the computer screen and into the living.

Roku breaks its revenue into two closely connected segments: Player and Platform. The Player segment revolves around manufacturing TVs, streaming devices and accessories for sale through third-party retailers as well as direct to consumers.

While this was the core of the business until recently, it now accounts for only 45% of all revenue and 15% of gross profit with sales declining 3% from last year's levels. Still, at $61 million a quarter and 15% margins, this remains a core piece of the overall Roku enterprise.

However, the Roku "Platform" -- licensing rights to its technology as well as distribution fees from content networks, not to mention advertising -- has become the real sizzle here. In first-quarter 2018 these content-oriented operations brought in $75 million in revenue. That's double what we saw in the 2017 first quarter, and between that 100% growth rate and 70% margin we're looking to this side of the business to transform what was once a niche device maker into a media platform of tomorrow.

Roku had a tremendous quarter, beating its quarterly guidance forecasts and raising its full-year guidance. The most important metrics for the growing company are the expansion of its user base, which grew 47% year-over-year to 21 million active accounts. While the company does not charge recurring subscription fees, the size of its audience is still a factor in evaluating the reach it can offer advertisers.

We believe that the shift from hardware to services will turn the stock around. Roku's operating system is being packaged on more and more smart TVs from third-party manufacturers. Since 2014, the company has gone from a standing start to seeing its technology incorporated into 25% of all smart TVs now on the market.

As more smart TVs are sold with Roku technology already onboard, the market for their platform services will expand exponentially, without the company having to increase its manufacture of low-margin players. This is a win-win for Roku going forward.

Millennials are now the biggest demographic group. Many are unreachable to conventional advertisers -- except via the Roku interface, which streams the company's authorized messaging to the screen.

We should also note that with Apple (AAPL) , Amazon (AMZN) and Google (GOOGL) as its prime competition, Roku could just as easily be purchased by one of its competitors looking to gain a foothold over the other two. Such an announcement would of course do wonders for the stock. So maybe having stiff competition isn't such a bad thing after all.

With a triple whammy of continued platform adoption by smart TVs, a steady stream of user growth and increasing revenue per user, Roku is well positioned to hit profitability by the end of this year, or possibly early next. Once Wall Street figures this company out, the sky is the limit.

Ari Charney, Investing Daily's Utility Forecaster

You wouldn't know it from the way its stock has performed, but Comcast  (CMCSA) actually had another winning quarter on the financial front.

First-quarter adjusted earnings per share grew 17% year over year, to $0.62, on an 11% jump in revenue, to $22.8 billion. This performance beat analyst estimates by 0.2% on the top line and by 5.3% on the bottom line.

Like its telecom peers, Comcast continues to see erosion in its legacy video services due to cord-cutting. Traditional video subscribers dropped by 96,000, causing revenue from this business to decline 0.8%, to $5.7 billion.

However, growth in high-speed internet customers (sales up 8.2%, to $4.2 billion) and business services (up 11.9%, to $1.5 billion) were more than enough to offset the decline.

Meanwhile, NBCUniversal saw segment earnings rise 13.1% year over year, to $2.3 billion, on a 21.3% jump in revenue, to $9.5 billion. These results were primarily driven by broadcasts of the Olympics and the Super Bowl.

Full-year earnings are forecast to climb 21%, to $2.49 per share, on a 6% increase in sales, to $89.7 billion. Given this strong growth trajectory, why is the stock in the doghouse?

The main reason is Comcast's $29 billion unsolicited offer for U.K. pay-TV broadcaster Sky, and its rumored preparation to also pursue assets of Twenty-First Century Fox  (FOXA) . These moves raise fears of a possible bidding war with Disney  (DIS) , which had already agreed to acquire these assets.

Odds are that Disney will still prevail, which would go a long way toward eliminating the overhang on Comcast's shares, at least until the cable giant finds its next mega-deal. Comcast is a Buy below $43.

Stephen Biggar, Argus Research

Entercom Communications Corp.  (ETM) describes itself as a leading American media and entertainment company, reaching and engaging over 100 million people each week, with coverage of close to 90% of persons 12+ in the top 50 U.S. markets through radio stations, digital platforms and live events.

The company is the number-one creator of live, original, local audio content and the nation's leader in news and sports radio. Entercom is home to seven of the eight most-listened to all-news stations in the U.S., as well as more than 40 professional sports teams and dozens of top college programs.

It offers local and national advertisers integrated marketing solutions across audio, digital and event platforms and has a nationwide footprint of radio stations.

Insiders at Entercom have been buyers of late, having acquired a total of 1,127,532 shares since the beginning of May. The stock is currently trading around $7.10 and has fallen sharply from over $10 around May. After the decline in the share price, insiders began adding to their holdings.

The shares are currently trading below all major moving averages (generally a bearish sign) and have underperformed the market over the past three months -- falling 26% compared to a gain of 1.6% for the S&P 500. Over the past year, Entercom lost 30% compared to a gain of 13% for the S&P 500. But insiders at the company seem to think now is a good time to jump in.

Of the 1,127,532 shares acquired in May, 363,181 were acquired at no cost to the insiders as they were part of a grant program. But the remaining shares were acquired at prices ranging from $7.41 to $10.

Gavin Graham, Internet Wealth Builder

As my top pick of the month, I'm recommending a global company that is close to being the "Holy Grail" for the telecom industry -- Vodafone Group PLC  (VOD) . It is the second-largest mobile phone operator in the world, as well as one of the leading providers of broadband TV and phone services in Europe, with over 400 million customers, of which 120 million are based in Europe.

Vodafone is one of the three largest mobile phone operators in the U.K., Germany, Italy, Spain, Turkey, Egypt, India and South Africa. In Europe, it provides Next Generation Network (NGN) services to 54 million homes after its recent deal to acquire Liberty Media's fixed networks in Germany and the Czech Republic, Hungary and Romania.

Vodafone is down 8% over the last five years before dividends, similar to the U.S. telecom companies, as retiring CEO Vittorio Colao has reshaped the sprawling patchwork of joint ventures and minority stakes that he inherited a decade ago.

Having sold Vodafone's 40% stake in Verizon Mobile in 2014 and distributed the proceeds to shareholders, Colao grasped the remaining nettle by selling Vodafone's Indian operations into a joint venture with rival Idea Telecom last year.

Vodafone is poised to benefit from its clearer structure. As with all companies with a large exposure to slow-growing Europe, Vodafone has been experiencing low growth in its European business, but the Liberty deal and the rapid growth of data, both on mobile and fixed networks, is helping offset this. With the cash drain of India now off its balance sheet, Vodafone should see growth in EBITDA.

Vodafone has a strong position in both the wealthy European markets and the fast-growing emerging Africa, the Middle East and Asia Pacific markets. It has a strong balance sheet and is forecasting 1%-5% growth in EBITDA and dividends for the next few years, which are covered by free cash flow after spectrum payments.

It represents a lower-risk way to play changes in technology and economic growth while paying an attractive dividend. Vodafone pays US$1.73 in dividends twice yearly, of which the interim payment represents one third of the total and the final payment is two thirds.

This is equivalent to a 6.6% yield and it increased 2% this year. It will be affected by the US$/€ exchange rate and is subject to 15% withholding tax unless held in a retirement account.

Chuck Carlson, DRIP Investor

Telecom stocks haven't exactly been market leaders in recent years. Intense competition, high capital-spending demands, the lack of interest in dividend stocks as a result of rising interest rates, and a plethora of merger deals that could potentially shift the competitive landscape have plagued the group.

However, if you believe in "reversion to the mean," you would expect the group to show better action this year. And a good play in the group is Verizon Communications  (VZ) . The stock is coming off a decent first quarter that saw the company's bottom line beat estimates.

While I'm not suggesting that Verizon is going to be at the top of the leaderboard this year, I do see double-digit total return potential for shareholders in 2018.

Verizon is getting a nice lift from corporate tax reform, which should help drive results for the year overall. Verizon is looking at a number of growth drivers. The firm expanded its online media operations and the launch of 5G broadband services in the second half of the year should drive demand for the company's network.

Also, it would not be surprising to see Verizon become an aggressive player in the acquisition market. The company had been rumored to be looking at CBS  (CBS) at one time.

A big draw for the stock is the dividend yield of nearly 5%. To be sure, high-yielding stocks have not been attracting investors, who view them as being on the wrong side of the rise in interest rates this year. However, if we enter a more volatile market period, with significant downdrafts, investors might find Verizon's yield a bit of a safe harbor.

-- This commentary was originally published June 13 on Real Money.

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