Seeking Alpha
Long/short equity, deep value, special situations
Profile| Send Message| ()  

In taking a look at the top media companies, we found they all have a similar problem, a cash problem; too much cash that is. The industry is plateauing and infrastructure is already in place, making the need for capital expenditures limited. Here are some of the best companies in the industry that are poised to throw off cash to shareholders: Viacom (VIAB), Disney (DIS), News Corp. (NWSA), Time Warner (TWX) and CBS (CBS).

Check out the cash positions of these top media companies:

CompanyCurrent Ratio
Viacom1.3
Disney1.1
News Corp.2.2
Time Warner1.4
CBS1.6

Even with industry current ratios above 1.0, the industry dividend yields remain relatively low, when compared to other yields investors can find in the market.

ViacomDisneyNews Corp.Time WarnerCBS
Dividend Yield1.80%1.40%0.60%2%1.10%
Dividend Payout23%18%15%37%17%

Of the companies mentioned so far, my top pick would have to be Viacom, which pays a 1.8% dividend yield and has current ratio of 1.3. Although its dividend yield is top among its peers, that is not the sole reason to jump into the media giant. The investment thesis for this company is its valuation and ability to generate cash. Viacom trades the cheapest of the media stocks on both a price to earnings (next year earnings) and price to operating cash flow basis:

ViacomDisneyNews Corp.Time WarnerCBS
Price to Earnings (next year earnings)10.813.713.713.814.4
Price to Operating Cash Flow1212.51713.713

All the media companies have been reducing capital expenditures over the past few years as the industry presents fewer and fewer worthwhile investments.

Company5-Year Capital Spending Growth
Viacom-6%
Disney19%
News Corp.-6%
Time Warner-28%
CBS-8%

Two of Viacom's main segments include media and entertainment. The media segment sales includes advertising time and affiliate fees from cable television operators. This makes up 68% of total revenue as of fiscal year 2012. The film entertainment segment makes up around 32% revenues. The lack of movie releases has not kept the stock down as it is up 22% over the last twelve months. Moreover, Viacom is generating strong free cash flow, which should help the company maximize shareholder wealth through dividend payments and share repurchases.

ViacomDisneyNews Corp.Time WarnerCBS
5-Year Cash Flow Growth5.60%4.50%-11%-15%--

The five-year operating cash flow growth has been the most robust for Viacom over the last five years, and this may well be the trend for the next five. Viacom recently re-signed its 7-year deal with DIRECTV (DTV), one that will allow the media company to generate a 20% rate hike. Other big agreements include those with Netflix and Hulu for distributing digital content. These businesses generate very high margins, around 75%, and should help boost profitability over the interim. Management plans on continuing to expand its digital content distribution deals, both in the U.S. and internationally in the near future. Worth noting is that Viacom is breaking into the online social gaming business.

Disney, the only company having grown capital spending over the last five years, had a record year for capital expenditures last year. Disney hopes to provide investors with a solid return on that invested capital by expanding into Asia and increasing traffic at theme parks.

News Corp is still planning to spin off its publishing business and is up 45% over the last twelve months on the news. This has put the company at a high-valuation and so investors might be best served holding out until the spin-off is complete. Time Warner posted non stellar numbers for the first nine months of 2012, but expects solid ad sales. CBS is making an initiative to get cash in shareholders hands by converting its outdoor advertising segment into a REIT and planning to divest its international outdoor unit.

Viacom also leads its peers with respect to return on equity and sustainable growth rate:

ViacomDisneyNews Corp.Time WarnerCBS
Return on Equity30%14%10%8%15%
ViacomDisneyNews Corp.Time WarnerCBS
Sustainable Growth Rate23.1%11.5%8.5%5.0%12.5%

With a 23% sustainable growth rate, opportunities are there for Viacom to outperform, which I think the company will take advantage of; seeing how Viacom has the best sustainable growth rate in the industry, it is hard to see why the media company should not trade closer to its peers. The EV/EBITDA industry average multiple is at 6.5, while Viacom trades at 5.4. Theoretically, if Viacom should trade at a 6.5 EV/EBITDA multiple, the stock would be undervalued at 16%. Don't forget, Viacom also pays a 1.8% dividend that is only a 23% payout of earnings. The cash flow growth and valuation make Viacom an intriguing pick in an industry that is ripe to return cash to shareholders. The media company returned some $3.4 billion to shareholders in 2012 via dividends and share repurchases.

Source: These Media Companies Have A Cash Problem