In show business everybody wants to be under the spotlight, not just actors. As higher ratings means higher revenues, media companies compete hard to outperform their peers. Entertainment firms like Discovery Communications Inc. (NASDAQ:DISCA), Scripps Networks Interactive, Inc. (NYSE:SNI) and CBS Corporation (NYSE:CBS) certainly know a thing or two about delivering highly sought-after TV content, yet face different prospects and growth opportunities. Let’s take a closer look at them and see if they could entertain you portfolio.
Discovering the world
The company’s recent move towards reality-based programming granted Discovery Communications Inc. (NASDAQ:DISCA) a record in domestic viewership, and with domestic and international revenues increasing, the company’s stock has surged 62% during the last 12 months. Discovery trades at $81 or 32.8 times its earnings, at a 44% premium to the industry average, but offers industry-leading margins. Is it a buy? I’d consider it is.
My case rests on the international growth the firm has, and should continue to experience. Although domestic pay-TV penetration is very high, the international pay-TV market is not yet mature and holds enormous growth potential for the next decade, especially in emerging markets where pay-TV penetration is well below 50% (for example, Brazil). Discovery Communications Inc. (NASDAQ:DISCA), who managed to establish its networks on concentrated international pay-TV platforms a long time ago, is more than well positioned to benefit from this growth.
On the downside, my immediate concern regarding Discovery Communications Inc. (NASDAQ:DISCA) is that advertising represents about half of the firm’s revenue, a higher proportion than some of its peers. This means that Discovery’s revenue is very sensitive to any economic slowdown or pullback in ad spending that may take place in the near future.
What a lifestyle
Scripps Networks Interactive, Inc. (NYSE:SNI) is an American media company focused on lifestyle content. The company’s cable networks include Home & Garden Television and Food Network, which combine to generate about two thirds of the firm’s revenue and hold a wide and loyal audience in the domestic market. With relatively inexpensive programming compared to its peers, and particularly attractive to advertisers (due to the economic position of its audience), Scripps’ flagship networks are remarkably profitable, generating estimated EBITDA margins well beyond 50%.
Trading at $71 or 15.9 times its earnings, Scripps Networks Interactive, Inc. (NYSE:SNI)’ shares have gained over 20% during 2013 and offer industry leading margins and returns. My take? This is definitely a stock to watch.
The company’s last reported quarterly results beat analyst estimates thanks to substantial growth in advertising and affiliate-fee revenue — up 10% and 8.5% year-over-year, respectively. Both sources of revenues are expected to remain healthy in the near future, particularly affiliate-fees. The appearance of new players in the video distribution market (like telecom companies Verizon and AT&T) should give more bargaining power to owners of popular pay-TV content when negotiating affiliate fees with cable and satellite companies.
As with Discovery, my concern about the company is that an enormous percentage of its revenue (in this case, approximately 70%) derive from marketing and advertising, making Scripps Networks Interactive, Inc. (NYSE:SNI) particularly sensitive to macroeconomic conditions or changing trends in ad spending. In addition, it should be mentioned that unlike many of its peers Scripps Networks Interactive, Inc. (NYSE:SNI) has yet been unable to grow in the international market.
Pretty popular
CBS Corporation (NYSE:CBS) is a mass-media conglomerate focused on the TV, radio and billboard businesses. CBS’s Television Studios and Television Network are the backbone of the company with a strong track record of generating hit TV-shows and holding industry-leading audience ratings for the past 10 years.
Its broadcast network reach and chart-topping ratings have made it extremely attractive to advertisers, who value CBS’ success and stability. Similar is the case for TV writers and producers, who see this popular network as a great place to launch their new shows.
Beyond advertising, the firm has developed several windows to monetize its popular programs after their original airing, which include strategic deals with fast-growing streaming companies (Netflix, Hulu, Amazon). This is currently benefiting CBS, as its first quarter results reported a strong double-digit growth in streaming revenue that boosted its bottom-line. In addition, I should point out a fact often overlooked: the firm is benefiting financially from the advance of pay-TV as it offers syndication rights to major cable networks (like TNT or TBS) for re-runs of its programming.
Having soared over 55% during the last year, CBS trades at $52 or 20 times its earnings, a premium to both the industry average and the S&P 500’s. Although the firm looks solid, I would wait for a more attractive entry point to become available before chipping in.
Bottom line
Although these three firms have been performing well lately, my long-term bet here is on Discovery. With solid international growth opportunities ahead, increasing domestic viewership ratings, and a strong track record of producing popular (yet inexpensive) TV content, this is a company worth considering if you fancy investing in the entertainment industry.
Victor Selva has no position in any stocks mentioned. The Motley Fool recommends Scripps Networks Interactive (NYSE:SNI).
The article 3 TV Stocks to Watch Closely originally appeared on Fool.com and is written by Victor Selva.
Victor is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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