4 Ways Investors Can Play the Media and Broadcasting Group

From TV and cable broadcasting to online streaming services, the media landscape is undergoing significant change, creating both risks and opportunities. Four leading investment experts and contributors to MoneyShow.com highlight their top ideas for exposure to this market. Chuck Carlson, DRIP Investor CBS Corp. owns the most-watched television network in the U.S. and one of the world's largest libraries of entertainment content. Businesses include CBS Television Network, The CW (a joint venture between CBS Corp. and Warner Bros. Entertainment), CBS Films, Showtime Networks, CBS Sports Network, and Simon & Schuster. The company has been making a lot of headlines in recent months, but mostly for the wrong reasons. The legal battle between top executives and controlling shareholder, National Amusements, garnered much attention. And the high-profile exit of its long-time CEO Les Moonves was another major distraction. The headlines have overshadowed solid operating performance by the company. Per-share profits have beaten estimates in each of the last four quarters, and the firm's efforts in digital streaming continue to accelerate. The firm continues to add to its content vault with five new company-owned programs in its prime-time CBS network lineup. Also, its direct-to-consumer streaming services continue to grow at a healthy rate and are on track to reach a combined eight million subs, a year ahead of original projections. Content licensing and distribution fees should also contribute to healthy earnings in 2019. For 2019, CBS should earn at least $5.75 a share, giving the stock a P/E ratio based on that estimate of just over 8. That seems to be a very modest valuation for a company that is succeeding greatly in transforming its media business into the digital world. The valuation is probably being held back by the possibility of a CBS merger with Viacom sometime over the next 24 months. However, investors seem unduly pessimistic based on this speculation. The stock's price adjustment in the last month has created an excellent value play in CBS shares. A kicker to the capital-gains potential is the stock's yield of 1.5%. Given the company's size -- market capitalization is less than $19 billion -- CBS even has some takeover appeal for a media company wanting a treasure-trove of company-owned content and a digital model that is working quite well. Tuna Amobi, CFRA Research's The Outlook Our latest Focus Stock is Comcast Corp. , which carries CFRA Research's highest investment recommendation of 5-STARS, or Strong Buy. Comcast is a vertically integrated media and entertainment conglomerate with diversified distribution and content assets. As the largest U.S. cable operator, the company provides a suite of Pay-TV services to residential and business customers, with a recent subscriber base (as of Dec. 31, 2018) as follows: video, 22.0 million; high-speed Internet, 27.2 million; and voice, 11.4 million. The company's NBCU division includes broadcast networks (NBC and Telemundo) and several cable channels (including USA, Bravo, E!, Oxygen and MSNBC) and broadcast networks, as well as filmed entertainment and theme park assets. In October 2018, Comcast acquired Sky, a Pan-European satellite television broadcaster, for about GBP 30.2 billion ($39.5 billion), prevailing in a bidding war against Disney . Comcast also owns a 30% stake in Hulu, a steaming video site. The breakdown of 2019 consolidated revenues and total segment adjusted EBITDA (pro forma for the Sky acquisition) are as follows: Cable Communications (50% and 66%); NBCU (32% and 25%); and Sky (18% and 9%). After what we saw as saw as relatively encouraging Q4 results to wrap up a very remarkable year in 2018, in late January 2019, the company affirmed its positive outlook on a potentially transformative acquisition of Sky. The Sky integration bodes well, we think, for further business and geographic diversification, providing some complementary content offerings and meaningfully increasing the company's international exposure. Following the Sky consolidation in October 2018, we project consolidated revenues of about $108.96 billion in 2019, up about 15%, against comparisons to the prior-year revenues at NBC related to the Super Bowl and Winter Olympics, and to record political advertising for local television stations. Other key drivers will likely include higher penetration of bundled residential and business services, continued healthy growth in NBCU's TV subscriptions/affiliate fees and content licensing revenues (versus relatively stagnant advertising growth). Also, we anticipate modest revenue growth at NBCU's theme parks division and easier comparisons for filmed entertainment, as well as content revenue and subscriptions growth at Sky. We project 5.2% revenue growth in 2020. Based on our 12-month target price of $44, we see further upside for the shares at current levels. Our target price implies a total EV/EVITDA multiple of 9.2x our 2019 estimate, which is slightly above the median multiple of the large media peer group, and versus its five-year average of 8.5x. We think this premium is partly justified by potential economies of scale and potential upside on the Sky integration. After a 10% dividend increase in January 2019, the stock recently offered an implied yield 2.2%. We note some potential risks to our recommendation and target price. First, we would be wary of merger execution risk or potential dilution on the Sky acquisition. Also, we see uncertainties on potential developments on the FCC's regulations on broadband, as related to its classification (Title II) as well as a pending court challenge to a recent overturn of open Internet principles (Net Neutrality). Next, we are wary of continued customer attrition in the U.S. pay-TV market amid intensifying competition from cheaper online video services such as Netflix and others. Lastly, given the company's international exposure, our outlook could be undermined by geopolitical risk factors (e.g. Brexit) or by related foreign currency volatility. Richard Moroney, Dow Theory Forecasts Disney has a long history of both aggressive and wise brand management; it operates in four business segments, each of which allows for plenty of cross-company marketing and sales prospects. Since Snow White and the Seven Dwarfs premiered in 1937, it has been re-released eight times, along the way inspiring toys, theme-park rides, video games, and a Broadway musical. Disney became the first company to blend films and theme parks with traditional media when it purchased the ABC network in 1996, which kicked the branding potential up another notch. Even now, 90 years after Mickey Mouse introduced himself to the world in Steamboat Willie, Disney still trades on the power of his iconic image. These days, the company creates its own brand networks, such as producing television shows, action figures, and themed thrill rides connected with its movies, controlling many levers on the machine. Over the last year, Disney parlayed sales growth of 8% into 21% higher per-share profits and 16% higher operating cash flow. While all of the units are economically sensitive, they follow their own cycles, allowing for fairly steady company-wide sales and profit growth over time as strength in some areas offsets weakness in others. The media unit includes the ABC broadcast network but generates most of its revenue from cable stations, particularly the various Disney Channels and ESPN. The parks and resorts unit has enjoyed gains in both attendance and guest spending sufficient to offset higher costs in recent quarters. The consumer-products unit includes Disney's interactive media properties. Studio entertainment provides the biggest booms and busts, as one or two blockbusters can make a year - and set a high bar for the next. A pending $71 billion deal to purchase assets from Twenty-First Century Fox should beef up Disney's media and studio units. At less than 16 times projected year-ahead earnings, Disney trades at a discount of at least 17% to the median for both the media and movies & entertainment industries. The company reported adjusted per-share profits of $1.84 for the December quarter, down 3% but well ahead of the consensus of $1.55. Revenue held flat at $15.30 billion but also topped analysts' expectations. Operating cash flow slipped 6% to $2.10 billion. Sales rose 7% at Disney's media unit and 5% for its parks and consumer products segment, offsetting a 27% decline at the studio business. Disney's studio ran into a tough comparison from the year-ago quarter, which was boosted by the release of Star Wars: The Last Jedi and Thor: Ragnarok. Within the media unit, broadcast operating income surged 40% from higher ad sales and affiliate fees, while the cable-network's operating income fell 6% due to higher programming costs at ESPN. Disney is rated as a Long-Term Buy. Ben Reynolds, Sure Dividend AT&T , one of the largest telecom companies in the United States, is also a leading player in media. The Time Warner and DirecTV acquisitions have increased AT&T's debt, but they've also enhanced the company's growth prospects. The company is focusing on both the means of content distribution (its primary telecom business) and content creation (Time Warner). The combination will create a company with higher margins moving forward. While AT&T does have an elevated debt load, the company's management has clear plans to deleverage. AT&T expects $26 billion in cash flows in fiscal 2019. The company plans to use funds to deleverage significantly. AT&T has a low valuation. The stock is currently trading for just 8.5 times expected 2019 earnings-per-share of $3.60. The stock is cheap because the company has increased its debt load after the large acquisitions of both DirecTV and Time Warner. What stands out about AT&T's stock is its high dividend yield of 6.8%. And, the company has paid increasing dividends for 35 consecutive years. With a low valuation, a high yield, and decent growth prospects ahead, AT&T is a strong buy for income-oriented investors at current prices.

4 Ways Investors Can Play the Media and Broadcasting Group

Leading investment experts highlight their top ideas for exposure to the media sector.

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