By Eric Single
When the economy began its decline, the entertainment industry was one of the first to feel the effects of weakened consumer confidence and lowered spending. While companies like Netflix (NFLX) have been able to thrive in a low spending environment, many names in the space have struggled. That being said, if you count yourself among those who feel that the economy has positioned itself to get back on track, consider these three entertainment companies as stocks that stand to benefit.
The Walt Disney Company (DIS) appears to have returned to form after absorbing the industry-wide blow to discretionary spending caused by the economic slowdown. The highly diversified worldwide entertainment company has built momentum, seeing its sales growth return to, then surpass its 9-year rate of 5.19%, up to 6.4% over the past four quarters. The company’s $4 billion acquisition of Marvel Entertainment in December 2009, bore early fruit with the positive reception surrounding the initial release of the new Captain America movie, and it’s hard to believe that the license to the comic book film studio’s library of over 5,000 characters will do anything other than expand from here.
Disney also appears to have big plans for the growing markets in India and China. Last week, it announced its plan to buy the remaining 49.56% stake it did not already own of India’s UTV Software Communications, a holding company that makes and distributes movies and broadcasts a clutch of movie and entertainment channels. The deal could end up being one of the largest in the history of the Indian media industry. Farther down the road, Disney plans to open an amusement park in mainland China in the latter half of the decade. With a P/E of 17.04, Disney is currently selling at a slight premium to the ratio of the overall market, but compared with the company’s historic P/E level, it appears that you stand to catch this stock on the upswing by buying in now. Disney was a high yield king of this quarter.
International Speedway Corporation (ISCA) is a promoter of motorsports themed entertainment activities in the United States and the owner of 13 major motorsports entertainment facilities around the country, including Daytona International Speedway and Talladega Superspeedway. The height of the economic slowdown had a substantial negative effect on ISCA’s revenues in 2009, down to $693 million from $787 million in 2008, and in the following two years ISCA has failed to return to positive sales growth. Optimistic reports about the growing interest in NASCAR and the other motorsports circuits and a rebound in sponsorship revenue seem to have propped up the company’s outlook – ISCA was upgraded to an “Outperform” rating from “Underperform” by Raymond James in early July. If its plan to pump up company-owned Kansas Speedway with the opening of the $368 million Hollywood Casino in early 2012 in partnership with Penn National Gaming Inc. (PENN) remain on track, ISCA should gather additional momentum heading into the 2012 racing season.
ISCA’s margins are very vulnerable to sales due to its high operating leverage, so it would follow that if the company can turn its revenue numbers around, investors will not have trouble seeing the positive impact on margins. The big question is how far down the road that turnaround will come – revenue has dipped by 2.2% and 2.4% respectively in the first two quarters of 2011. Investors might want to wait for ISCA to show some tangible positive growth before jumping back on board.
InterActiveCorp (IACI) is an internet media company with more than 50 brands, including search engines such as Ask.com, personals sites such as Match.com and online entertainment sites such as CollegeHumor Media. IACI shifted its focus to internet media in the past decade after selling its entertainment interests in the merger that formed NBC Universal and then spinning off its travel businesses, headlined by Expedia, in 2005. In 2008, IACI spun off an additional four publicly traded businesses: HSN, Inc (HSNI), Interval Leisure Group (IILG), Ticketmaster (TKMT) and Tree.com (TREE). The company recently offered to purchase the remaining stake in leading European online dating company Meetic, which it already had announced a joint venture with into the Latin American market.
In the past few years, IACI’s earnings have been negative, but cash flow remained solid over that same period due to large non-cash expenses, and last year the company did post positive earnings of $94.4 million. This has allowed IACI to remain essentially debt free and to buy back 50 million shares since 2008. The operating margins are bolstered by earnings growth that has remained up around 20% in the past year. With a more focused business strategy and little debt in addition to the appointment of new CEO Greg Blatt, IACI finds itself optimistically positioned for strong growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.