Traditional media and entertainment have not succumb to the Internet as quickly or severely as many people predicted. In fact, it seems that a few media giants have secured their standing in the long run. Quality programming and products continue to attract consumers as they did in the past. So while the method of transmission may have changed, the game remains the same, with customers seeking out the best content for their money.
Three media giants that are currently dominating their respective niches seem to have the formula of quality over quantity etched in stone.
Fun money
The Walt Disney Company (NYSE:DIS) has a practical monopoly on fantasy. With the recent acquisitions of Lucasfilm (2012), Marvel (2009), and Pixar (2006), it’s very obvious that management is looking well into the future-in terms of both development as well as generating sustainable cash flow.
While current valuations may seem a bit high with a price-to-earnings ratio of 19.30, future growth projections seem to justify this current price. Analysts are predicting a 25% earnings increase in just one year alone, bringing the forward price-to-earnings ratio down to a very attractive 16.30.
With a new “Star Wars” film being directed by the brilliant J.J. Abrams, a ABC TV show based on Marvel’s “S.H.I.E.L.D.” team which promises to be a hit, and the discussion of a “Star Wars” theme park, it looks as if the fairy tale growth story for The Walt Disney Company (NYSE:DIS) is still in the early chapters.
The Walt Disney Company (NYSE:DIS)’s footprint is increasing as well. It’s becoming a media giant the likes of which the world has never seen before. From ESPN to the The Walt Disney Company (NYSE:DIS) theme parks, it offers content and experiences that are nearly impossible to replicate. Management is smart and dedicated to future growth and sustainable profits. Debt is low with a long term debt/equity ratio of 0.32 and profit margins are high with an average five-year net profit margin of 12.20%. Basically, it doesn’t get any easier than this when it comes to recommending the company for a long-term buy and hold.
The undisputed
Without a doubt, the greatest manager in television is Les Moonves, and CBS Corporation (NYSE:CBS) is his lucky employer. With over 20 years of managerial experience ranging from Warner Bros. to Viacom, Inc. (NASDAQ:VIAB), this legend is responsible for presiding over hits such as the no. 1 drama/scripted program NCIS, the no. 1 sitcom Two and A Half Men, the no. 1 newsmagazine 60 Minutes, and the no. 1 daytime drama The Young and the Restless.
With The Big Bang Theory recently taking over that no. 1 sitcom spot, CBS Corporation (NYSE:CBS) will have no problem retaining and growing major advertisers. In fact, for the week of June 3, 2013, Nielsen showed that CBS had 6 of the top 11 shows in terms of ratings, leaving NBC, ABC, and Fox to fight over the remaining 5 spots. Indeed, if it wasn’t for the NBA finals then ABC would not have a spot in the top 11. For NBC, The Voice makes up 2 out of 3 of its appearances. Fox has zero spots in the top 11. Meanwhile, 6 different shows are responsible for all of CBS Corporation (NYSE:CBS)’ spots in the top 11, if you count NCIS and NCIS: Los Angeles as separate. Diversity in programming would have to be a major strength going forward for CBS.
While CBS Corporation (NYSE:CBS) does trade at a premium at an 18.20 price-to-earnings ratio compared to an industry average of 15.70, it is well worth the extra money. A price/earnings-to-growth ratio of 1.15 foretells great things and surpasses the industry average of 1.69. The first quarter 2014 should see an almost 20% earnings increase if analyst estimate’s hold. This would make for a forward price-to-earnings ratio of less than 14. Considering the nature of this company’s stock to trade at a premium, this means that stock price appreciation is expected over the next year.
With attractive growth projections, a low long-term debt/equity ratio of 0.63, and an impressive net profit margin this last year of 14.20%, the future appears fundamentally sound for CBS Corporation (NYSE:CBS).
Dream on, Lady Stark
While Time Warner Inc. (NYSE:TWX) has many different operations, it seems this company lives and dies not by the sword, but rather by subscriptions.
In fact, if you were to look at a 10-year chart you’d notice tell-tale signs of Sex and the City and The Sopranos, both produced for Home Box Office (HBO) gaining popularity as subscription rates rose steadily from 1998 (Sex in the City) and 1999 (The Sopranos.)
Well, HBO is at it again. That subscription channel that first brought you original programming back in 1990 with Dream On has hit paydirt with Game of Thrones.
The buzz is hard to ignore. References to the series are appearing in major news articles, twitter feeds, and all over my friend’s Facebook pages. The DVD’s at every major store I visited in the last few days were completely sold out. I personally witnessed frantic mothers who were seeking this key last-minute Father’s Day gift only to leave empty handed.
Looking at some key statistics, we see a fairly-valued company with a 17 price-to-earnings ratio versus an industry average of 22. An acceptable long-term debt/equity ratio of 0.64 coupled with a net profit margin of 11.00% this last year are attractive. But the best part is that forward-looking estimates project a 30% earnings increase year-over-year, making for a forward price-to-earnings ratio of 13.60. This means that the best is yet to come if these projections hold.
However, the one caveat for HBO is that future programming of such fine quality isn’t easy to create or produce. The company must continue to represent the absolute pinnacle of programming if it expects people to pay the subscription price. If a content doldrum begins to manifest, like that which appeared following the resolution of Sex and the City and The Sopranos, investors will begin to bail fast and subscription rates will surely decline.
Conclusion
Consumers will always pay fair money for quality products. So will investors. These three companies represent three different niches in the entertainment industry. Their commonalities are great management, superb current and future products, attractive balance sheets, and stock prices that are acceptable entry levels for the long-term investor. For secure investments, The Walt Disney Company (NYSE:DIS) and CBS Corporation (NYSE:CBS) look fantastic. For a bit more speculation perhaps Time Warner Inc. (NYSE:TWX) might be the right call. Remember, Time Warner Inc. (NYSE:TWX) went up almost 800% in just 18 months during the introduction of Sex and the City and The Sopranos. A risk/reward ratio like that is hard to ignore for the adventurous investor.
James Catlin has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of The Walt Disney Company (NYSE:DIS).
The article How a Mouse, a Moon, and Medieval Mayhem can Make You Money originally appeared on Fool.com.
James 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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