The media giant Walt Disney Company (NYSE:DIS) recently declared solid earnings for 1Q13 where nearly half of its revenue came from its Media Network Segment. ESPN remained Disney's incredible growth driver and the company observed an exceptional growth rate due to the acceleration in sports rights.
On the other side, the Netflix (NASDAQ:NFLX) deal strengthened Disney's online initiative. Netflix via this deal became Disney's exclusive subscription TV platform for featuring films from Disney, Pixar & Marvel. This in return will pose a threat to pay TV service channels of Time Warner's (NYSE:TWX) HBO and CBS' (NYSE:CBS) Showtime. In my opinion, the Disney/Netflix combo is a win-win situation for both companies. Via this deal, Disney will become the first major studio to overtake the traditional cable TV segment and Netflix on the other side, will enjoy providing Disney Library Films and Disney Channel with direct to video titles.
The company is also aggressive in share repurchases - Buyback of shares from LucasFilm will leave Disney with ~$330 million (extra cash) which will help it in meeting its heavily budgeted Shanghai based theme park (costing around $4.4 billion). To date, Disney is done with most of its capital expenditures and the investors can expect lesser cash outflow this year and more room for dividend to its shareholders.
Excellent brand image
Disney is highly popular in its business segments, be it theme parks, studio entertainment or media networks. It is very likely that its Shanghai based theme park will follow the footsteps of Disney's Domestic Parks and will be as popular in the Chinese masses. Disney should also benefit from the new market opportunities tied up to Park extension - development of cruise ships, domestic expansion of Disneyland, development of new hotels in Orlando and the Aulani resort in Hawaii.
Disney's other competitors that offer TV programming and broadcast services are Viacom (NASDAQ:VIA), NewsCorp (NASDAQ:NWS), CBS and Time Warner. Among these, I favor Rockwell owned Viacom and CBS. The reason I like Viacom is because of its free cash flows which it is using aggressively for share buybacks. CBS, on the other side has a strong growth potential in the near future because of its syndication revenues. Let's discuss each of them in detail.
Viacom: Though, its recent 1Q13 earnings were not strong enough, the company still has a stronger balance sheet to lure investors. The owner of Spike, MTV, Nickelodeon, Paramount Studios, Comedy Central, BET, etc. has a P/E ratio of 16.76 and 1.8% dividend yield; which for sure are good figures for a Media Company. From past 7 years the company has maintained sufficient cash reserves which it is using aggressively in share buybacks. The company bought back 13.3 million shares for $700 million during the quarter. This accelerating tendency of share buybacks will further increase its EPS in the upcoming years.
Another strong peer of Disney, CBS Corporation, is popular for its high-rated TV programs. In fact nine of its shows are among the top 10 in TV ratings. The company is also enjoying higher syndication revenue from CSI. Side by side, its prime time hit NCIS is generating stable ad revenue. I expect, this trend to persist as programs like The Good Wife, NCIS, Blue Bloods, and Hawaii Five-O are already sold to cable for the next two years.
CBS has maintained sufficient free cash flow of 163 million which will further aid it in its share buyback program and dividend yield. In addition, it gives stronger returns on investment which currently stands at 9.6%.
The final take
Summing up, I feel Disney, Viacom and CBS are excellent stocks to offer excellent returns in the long run. In case, I have to pick one out of the three, I would like to place my bet on Disney. This company still has more room to grow and the investors can further expect successful acquisitions like Lucasfilms to come in the future. In addition its other two business segments - movies and theme park look very promising. The current share price of Disney reflects investors' confidence, and I feel it's just the beginning of the 2 year upside run. I would recommend Disney as a strong buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.