In an earlier article, I argued that Time Warner's (NYSE:TWX) problems were exaggerated. With the stock up 14.8% since then, it may now be an attractive time to hedge against downside risk by investing in other media companies. Comcast (NASDAQ:CMCSA) and News Corp (NASDAQ:NWSA) are two entertainment firms that should be considered, since they both receive close to a "strong buy" rating on the Street.
From a multiples perspective, News Corp is the most undervalued of the three. It trades at a respective 14.7x and 10x past and forward earnings. Time Warner and Comcast meanwhile trade at 14.8x and 16.6x past earnings, respectively. At the same time, News Corp also offers the lowest dividend yield at 1.13% versus Comcast's 1.98% and Time Warner's 2.73%. While the strengths of all of the firms are attractive, as a value investor, I do not find that these media companies meet the criteria of being "cheap" at the present moment.
News Corp is the most liquid with $4B worth of net debt, representing 9.1% of market value. Net debt for Comcast and Time Warner, meanwhile, stand at a respective 62.6% and 42.5% of market value - substantially more. It should be noted that Comcast is engaged in somewhat of a different business, as it provides more telecommunications services, in addition to general media.
On the third quarter earnings call, Comcast's CEO, Brian Roberts, noted strong performance:
I'm pleased to report another quarter of strong performance across key financial, operating and product areas. Our primary focus has been on great operational execution and on extending our industry leadership.
Let's begin with Cable, which really had an outstanding quarter, making this the fourth consecutive quarter of improving customer metrics. Our combined video, voice and data customer additions increased 13%. In addition to customer growth in high-Speed Internet and voice, we saw a continuing improvement in video, where we reduced our customer losses by 110,000 over last year's third quarter.
High-speed Internet was, once again, the largest contributor to Cable's revenue growth. Every quarter this year, we've added more high-speed Internet customers than in the same quarter of 2010, and we continue to take share as we expand the differentiation between our high-speed service and DSL.
Business services is also becoming a significant driver of our growth, as annualized revenue approaching $2 billion and 39% growth in the quarter.
While the impressive performance makes me more confident that management will weather macro headwinds, I remain concerned about poor ratings. As a matter of long-term sustainability, Comcast needs to significantly improve customer satisfaction given emerging competition. In particular, the development of Apple TV (NASDAQ:AAPL), supposedly by Jeff Robbin, is a tremendous risk that the firm will need to address. With that said, Comcast has been improving customer satisfaction.
The shift to All-Digital and DOCSIS 3.0 helped drive the strong third quarter earnings and remains a catalyst going forward. Management has been converting most of its analog bandwidth to digital in an attempt to innovate. Currently, 300K choices are available for On Demand and TV and nearly seven folds more are available online. The expansion into Xbox will also help retain a younger audience and hopefully hinder the market share growth for an Apple TV product.
I am further optimistic about the company's XFINITY brand and Cable performance. NBCUniversal is performing strong and, in my view, its Universal Orlando park remains a great marketing vehicle that can unlock revenue synergies. The park will likely produce around $1.4B in 2011 revenue. I anticipate that park restructuring, cost reductions, and product releases will help boost ROIC from around 6.8% in 2010 to around 12.4% by 2013.
Consensus estimates for EPS are that it will increase by 25.2% to $1.59 in 2011 and then by 18.9% and 15.9% more in the following years. Of the 7 revisions, 6 have been made downwards. Assuming a multiple of 15.5 - lower than the current one, but still representing a premium to all of peers - and a conservative 2012 EPS estimate of $1.80, the rough intrinsic vale is $27.90. This represents a 22.6% margin of safety. Betting that the value gap will be closed, in my view, is risky given the high growth expectations. With that said, I find that the fundamentals, particularly in regards to Cable restructuring, are solid enough to merit investing in the near future when macro concerns subside.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.