Four Media Stock Opportunities in These Turbulent Markets

A few months back on Contentinople, I wrote about emerging opportunities in media stocks, but warned that given the turbulent markets, they could get even cheaper, and that you might wait a  few months. Well, they did, and I hope that you did.

But I think now's the time to start looking at buying some of these stocks. After a broad market bludgeoning caused by, among other things, a credit panic, over-leveraged hedge funds, and a general crisis of confidence, stocks are now even cheaper.

There are more opportunities than ever for the brave souls who would like to wade in and try to snap up bargains in the media or media technology stock basement. Low valuation multiples, high dividends, and acid-generating levels of volatility are all present: And typically this combination of factors is an indication that the selling has been overdone.

How bad have things been? Well, even the billionaire media moguls have been squeezed. Viacom Inc. (VIA) and CBS Corp. (CBS) executive chairman Sumner Redstone was recently forced to sell millions of shares of Viacom and CBS through his holding company, National Amusements, reportedly on the basis of a margin call. And now The New York Post reported that National Amusements needs to refinance some $1.6 billion in debt.

Forced liquidation, panic, huge volatility -- historically, those are the marks of a good time to buy stocks, as Warren Buffett recently pointed out in the New York Times.

Having Buffett behind you is always nice. I'll add another factor, which is the calendar: "Sell in May and go away." Seasonally, stock performance is weaker from May through October, with historically better gains in the November through April time period.

With the end of October coming and an election approaching, I think it's possible that the mood of the market may improve, potentially giving us a sustained rebound -- even if it's not yet the start of a another bull market.

Even if we haven't hit bottom, buying media or technology stocks at these low valuations can now be done with relatively good risk/reward. But it's important to focus on profitable and cash-rich companies that don't require lots of financing, given the financing crisis we are in.

Below I've picked four names -- two in media and two in digital media technology:

CBS Corp.

When the executive chairman is forced to unload millions of shares under duress, it's a great example of the dynamics that have been ruling this market: forced liquidation, at any cost. The Redstone Raid has pushed CBS shares down to about $9, as of lunchtime yesterday, giving it an eye-popping dividend yield of 14 percent -- something along the lines of a junk bond. Could the dividend be cut? Sure. But the company says it doesn't intend to cut the dividend, and the company is still very profitable. CBS has booked $1.3 billion in profits over the last four quarters. That gives it a trailing price/earnings ratio of 4.6.

Of course, advertising will weaken with the economy. Consensus analyst estimates for CBS shares drop from $1.57 per share for this year to $1.33 per share for next year. At the low end, that gives it forward earnings ratio of 6.6. But let's assume even worse -- let's estimate that earnings next year are chopped in half to 75 cents per share. That gives CBS stock a forward ratio of 12. Still pretty cheap, even if the analysts are well off their estimates (which they usually are). In the meantime, you collect on that 14 percent dividend with the chance of substantial share appreciation on an economic recovery.

Adobe Systems Inc. (ADBE)

Adobe Systems Inc. owns some of the top franchises in digital media technology tools: Acrobat, Photoshop, and Flash are all near-monopolies. Toss in specialty software packages like Premiere, and it's clear that Adobe is a leader in digital media software. It's also a very well run company.

I think Adobe's positioning in necessary creative tools make it less susceptible than many technology companies to an economic downturn. As with Microsoft Corp. (MSFT) technology, many people must license the software to conduct daily business. Even if there were a nuclear apocalypse, I think we'd still be using Acrobat.

Adobe isn't quite as cheap as some of the other stocks on this list, but that's because of its position as a leader. It's also hugely profitable, and it has $2 billion in cash -- or $3.80 per share -- in the bank. This company isn't going out of business. Trading at a recent price of $28, Adobe had a P/E of 19, which is low for a technology growth stock. If you chop next year's earnings estimates in half, Adobe trades at a forward P/E of 30. I'd look to buy the shares from here to anywhere down in the low 20s, with a $20 stop loss.

Walt Disney Co. (DIS)

Like most media stocks, Walt Disney Co. had been pummeled on the expectations of a huge consumer slowdown, which would affect its movie studios, advertising-supported media products such as ESPN, and theme parks business. But at $24, Disney is approaching book value of its shares, which is $17.50. It's earned about $5 billion in profit over the last four quarters, giving it a P/E ratio of about 10, which is cheap for a blue-chip media franchise such as Disney.

One problem for Disney may be its $14 billion in debt -- though with a market cap of $45 billion and annual operating cash flow of about $6 billion, that should be manageable, even if financing costs remain persistently high in the credit freeze.

It appears to me that the market has priced in a financial Armageddon in which Disney's profits evaporate and it needs to start paying junk bond rates on its debt. I don't think it's going to happen. This stock looks cheap anywhere in the low twenties, and I would buy more approaching its book value.

Cisco Systems Inc.

Once upon a time, Cisco Systems Inc. (CSCO) was the blue-chip technology growth darling, for which investors would be willing to P/E multiples in the stratosphere. Not anymore. Now it trades like a beaten-down value stock, valued at 13 times trailing 12 months' earnings.

We'd be worried, if not for the fact that Cisco is sitting on a pile of $26 billion in cash and has only $7 billion in debt. And last we checked, it pretty much owned dominant market share of global IP-based communications networks. Will a global economic recession mean they'll turn all the routers off? I doubt it.

Let's use the conservative methodology of chopping next year's analyst earnings estimates in half. Analysts expect Cisco to earn $1.86 per share, so we'll give Cisco 90 cents in earnings estimates for 2009, pricing in a brutal recession.

That would give Cisco a forward P/E ratio of 20 (based on current estimates, it's at nine). It's worth a shot to buy this technology blue chip anywhere in the mid-teens. To be safe, give yourself a stop loss of $13. It's an unlucky number.

Disclosure: The author holds no positions in stocks mentioned.

Comments

[User 68127:]

Good calls.

2008 Oct 30 01:21 PM