As the economy picks up steam exiting a recession, more and more people are beginning to spend again on the luxury of good entertainment. It wasn't that the entertainment industry was in a deep slump either, quite the contrary. Either to drown their sorrows in a good movie or simply to escape some bad news for a while, people were still paying well for mini-vacations, gambling weekends, Broadway shows, or the latest shoot-em-up movies. In fact, according to a study by the Computer and Communications Industry Association (CCIA), box office revenues grew 25 percent from 2006 to 2010 from $25.5 billion to $31.8 billion, and that during the lowest of lows of the recession. Additionally, from 1998-2010 the value of the worldwide entertainment industry grew from $449 billion to $745 billion. The entertainment industry has had its ups and downs just like a lot of other industries, but has proven to be a steady-eddy for the long term investor.
Here are eight companies that are worth a look for those just beginning to invest into the entertainment industry as well as the veteran investor looking to add more to this segment's portfolio:
Lions Gate Entertainment Corporation (LGF) has been exceeding expectations with the franchises of The Expendables, Hunger Games and The Twilight Saga (which has grossed over $850 million) and continues to outshine competitors DreamWorks Animation, Inc. (DWA), Cinemark Holdings, Inc. (CNK), and Regal Entertainment Group (RGC) in sales, earnings, and share growth. The movie theatres help to boost earnings, while television provides the company's steady growth with the series The Dead Zone, Weeds, Nurse Jackie, Anger Management, Tyler Perry's House of Payne, and Mad Men. In addition, the company has a library of over 15,000 films and television shows, good relationships with Hulu, Amazon (AMZN), and Netflix (NFLX), and its expansion into China and Russia. Trading at around $32, for the 2013 fiscal year, the Lions Gate's revenues increased 71% to $2.71 billion. EBITDA grew to $329.7 million compared to $71.6 million in the prior year, and net income increased to $232.1 million from a loss of $39.1 million in the prior year. For the last fully reported fiscal quarter, the company's year-over-year revenue grew 21.8%, and its Accounts Receivables grew 0.3%. The company's valuation is very high and the average earnings estimate for next year on is expected to be $1.67. Compared to others in the movie business, I see Lions Gate as a buy to hold for a long term investor. Lions Gate's management team clearly have a competitive advantage over its competitors in producing works that are in demand and in tune to viewers' entertainment palates.
Some investors are touting that "RadioShack is back," and rightly so. The RadioShack Corporation (RSH), with its recent slogan, "Let's Play," is resurrecting itself by catering to the mobile and gaming sector that attracts gaming and cell phone accessory addicts to its stores to purchase the next cool play product. For some gaming purest, this is all that is needed for entertainment. I consider the RadioShack Corporation deeply undervalued with a market cap of $306 million, about half of its year-end Book Value of $598.7 million. The stock is trading at $3.06 per share, which considering the new management and new advertising firm, is a bargain compared to $20 levels it used to trade at not long ago. Still, the company has a long road ahead in order to convince a lot of investors who have since pooh-poohed this stock. The RadioShack Corporation currently trades for 1.38 times net current asset value and .68 times tangible book value per share. The company had plenty of cash at the end of the first quarter, $435 million or $4.36 per share, which will probably continue to decline as the company continues to climb out of the hole, including addressing its $712 million of debt. In addition, the company is making strategic alliances to improve exposure and branding recently signing a five-year contract with a subsidiary of the National Association of College Stores to install RadioShack-branded fixtures in campus bookstores. This will benefit both Radio Shack as well as campus bookstores offering headphones, and other electronic accessories. The potential market size is 4,000 college bookstores. Radio Shack is a good buy as an entertainment electronic store compared to faltering Best Buy (BBY).
Companies are bringing the world of augmented reality to the masses at a greater speed than ever before. Google (GOOG) already has its Google Glass ready to launch at the end of this year that allows the user to experience the entertainment of augmented reality, and Microsoft (MSFT) recently filed for a patent for its own version of augmented reality glasses. Not normally seen as entertainment stocks in the traditional sense, Google and Microsoft provide products that provide entertainment value such as YouTube for Google and xBox for Microsoft. Though Google has outpaced Microsoft in returns for investors, both companies are stalwarts that still serve well for the long term.
Another mover bringing entertainment in the world of augmented reality is Infinity Augmented Reality, Inc. (Infinity AR), (OTC:ALSO). Infinity AR is known for its platform that can connect Google's Android Glasses to an iPad or iPhone. The company recently released a video that shows the use of advanced facial, mood, and image recognition. Infinity AR invested and created a strategic alignment with Meta, the developer of mega-view augmented reality glasses that provides a new level of entertainment by allowing the user to view sporting events and watch concerts live--- all without leaving the couch. The company has put together a stellar management team with Enon Landenberg, the co-founder and managing partner of E-Dologic, Israel's first interactive advertising agency founded in 1999, at the helm as President and CEO. Infinity AR may poise well for the speculative investor who is willing to take a risk betting on the increasing demand for this form of entertainment.
World Wrestling Entertainment, Inc. (WWE) hasn't been a beacon of light for investors for some time. The company has made some big cuts including its dividend payments in order to correct its dismal state of cash flow. However, the company seems to be turning the corner making some smart moves in order to keep revenues flowing in. WWE recently launched on the ION network the WWE Main Event along with its existing deals with Comcast for the broadcast of Raw and Smackdown. The company also launched Saturday Morning Slam for kids on the CW network and is expected to release in partnership with Warner Brothers the animated movie Flintstones. WWE shares are trading at around $11.00, up 30% since June 2012. Wrestle Mania grossed a record $72 million and television revenues rose by 15% on a YoY basis. Pay-per-View viewership was up by 13% and home video viewership was up by 16% keeping loyal fans demanding more. First quarter revenue from live events was up from $26.6 million to $27.3 million, while revenue from pay per views was up from $15.8 million to $16.3 million. The digital media revenue was up from $6.9 million to $7.5 million, but television revenue was flat at $34 million. WWE has practically no debt and currently offers a 4% dividend. Some investors are running away from WWE, but I see now as the time to get on board for even greater pile-driving (sorry) growth.
Sirius XM Radio, Inc. (SIRI) is getting serious about diversifying its entertainment package. The company does not do a whole lot of advertising outside of its airwaves, but it does get exposure when Sirius subscribers begin talking about the new "Radio Sex" channel. Since the company focuses on automobiles and not mobile and computer software like Spotify and Pandora (P), it has been growing rapidly and improving its financials in line with the increase in auto sales. The company is also expanding into safety and security services. Up 80% since this time last year and trading at $3.20 a share, the company looks to be a good buy considering its 50 million shares traded per month, its rise from $.10 per share, and the company's following of subscribers that pay around $15 per month for more than just music. Sirius XM Radio is trading at only 6.6 times its earnings, which is a 14% discount to the industry average and is expected to deliver annual EPS growth rates close to 30% over the next five years. The company has a market cap of $21.2 billion and a P/E ratio of 6.0, below the S&P 500 P/E ratio of 17.7. It has operating margins of 26.6% over the last 12 months, compared to 23.7 % in 2012 and has a return on equity of 13.23%. Sirius shares are currently up 17.6% year to date and the company's strengths can be seen in its revenue growth, stock price performance, notable return on equity, good cash flow from operations and good financials with reasonable debt levels. For the long haul, I see Sirius as a good buy now.
Although Groupon (GRPN) is not an entertainment destination, the company does offer thousands of discounts for entertainment venues that range from go-cart rides to international cruises to wine tasting to Broadway shows. The company has about $94 million in cash and has increased capital expenditures by a whopping 600%. Groupon is currently trading at about $8.16 and has increased its users to 150 million adding 17 million since early 2012. The company recently began offering restaurant reservation services through Savored.com. that allows customers book tables at fine restaurants in at up to a 40% discount adding even more reason to like the company. And the company is indeed well-like with the stock is up 78% in 2013. Unfortunately, last year, the company was valued at $25 billion, but is now thought to be worth only $5.7 billion as competition in the online discount market continues to grow. Even with the stock tanking to its current price from an IPO high of $31 in 2011 and the firing of its CEO, the company is hanging tough. For the last quarter, gross billings increased 4% to $1.4 billion and revenue increased 8% to $601 million. Operating income was $51 million, a decline of $16 million YoY, but $37 million more than previous quarter. EPS was .03 per share, and GAAP EPS was -.01 per share. The company announced its second-quarter results for 2013 with revenue increasing by 7% year over year to $608.7 million. I see Groupon as another buy-now-for-the-long-haul stock.
The entertainment industry is growing with expanding theme parks, cutting edge technology in animated movies and augmented reality, and new forms of gambling and concert interaction. Like other industries, there are companies that will provide great returns while others will disappoint. However, the one certainty with this industry is that the public has an insatiable appetite that keeps it pouring more money into it.