By HD Carver
My folks were just kids during the Great Depression. They tell me the motion picture industry was about the only one booming. The reason was simple enough. For a nickel, you could manage an escape from the harshness of everyday life for a few hours in the local movie house. If you couldn’t afford the nickel, you could lose yourself in any number of serial dramas on the radio. Horseracing was another popular diversion, with many grasping at the opportunity to escape poverty on the back of one lucky horse. Entertainment today has taken on new dimensions, from the ubiquitous electronic games, to pay per view sporting events and streaming movies on the internet. Today, I want to take a look at some of the more traditional entertainment venues and see how they are faring in today’s tough economy and share my thoughts on how they might rate as an investment during the "Great Recession."
We begin with Walt Disney Co. (DIS), founded in 1923. DIS has morphed into an entertainment conglomerate of mind boggling diversity. Feature films are little more than a footnote on its balance sheet. This large cap trades at about $36.56 and has an attractive twelve month trailing price/earnings ratio of 10.98. The price/earnings growth ratio of 0.93 is top tier, and Disney remains in its own class. Possible competitors like News Corp (NWSA) and Time Warner (TWX) are consistently outmaneuvered by Disney's multidimensional, physical, online and media properties. As a value investor, I am pleased to see a price to book of 1.74 rounding out the excellent preceding fundamentals. Return on equity doesn’t disappoint either, clocking in at 13.35%. Quarterly year-over-year revenue growth doesn’t excite at a modest 7.00%, but quarterly year-over-year earnings growth does, at a hardy 30.20%.
The debt/equity ratio is 36.16, and current ratio is 1.14, demonstrating that Disney is well-equipped to handle long and short term debt. Trading at just above its 200 day moving average, I would certainly entertain the notion of adding this to my portfolio.
Dreamworks Animation SKG Inc. (DWA) is a small cap, trading at about $17.93 per share. A much younger and smaller company than Disney, Dreamworks was founded in 1985, and its market cap is a fraction of Disney’s. DWA’s trailing twelve month price/earnings ratio is appealing at 10.32, but the price/earnings growth ratio of 7.41 is abysmal. I have no complaint with the price to book which is 1.10. Return on equity isn’t terrible; reported at 11.84%. Quarterly year-over-year revenue growth is deep in negative territory at -14.90% and quarterly year-over-year earnings growth is a dismal -50.60%.
The debt/equity ratio is non-existent, as the company has no long-term debt, and the current ratio is hefty at 3.60. These fundamentals demonstrate that the company has a good deal of financial strength. It is trading a couple bucks below its 200 day moving average and has made some gains on rumors of a takeover. Dreamworks has been spun off, acquired and spun off again, most recently by Viacom, Inc. (VIA), so this rumor has a hint of credibility. If I were a rich man, I might just take this one for a test drive.
Lions Gate Entertainment Corp. (LGF) is a small cap trading at about $8.62 a ticket. LGF’s founding date is very close to Dreamworks', occurring one year later in 1986. Lions Gate’s twelve month trailing price/earnings ratio is remarkably high at 42.46, as is its price/earnings growth ratio of 6.11, but like golf scores, lower is better. The price to book of 28.75 follows the same dismal trend. LGF’s return on equity buoys our spirits, reporting in at 47.67%. Quarterly year-over-year revenue growth is in the twilight zone at -21.50%, and quarterly year-over-year earnings growth is an equally abysmal level, as evidenced by the income statements which do not report a profit in the past 3 fiscal years.
The debt/equity ratio is 2,274.59 (not a typo) and the current ratio is remarkably textbook at 1.36. These fundamentals demonstrate that the company has some financial issues. Nonetheless, it is trading perilously close to its 52 week high of $8.87 propelled by the success of its recent live action thriller “Abduction” and its announced release of more than 100 titles on DVD through Amazon.com, Inc.’s (AMZN) subsidiary, CreateSpace.
As a value investor, I’d have to pass on this one, but emotionally, I’m a fan.
Shifting to the small screen, we’ll take a look at CBS Corporation (CBS). CBS Corporation had its origins in radio, and dates back to 1927. If you are history buff, you can learn more here. CBS Corporation shares trade in two classes, voting and non-voting, with CBS being the non-voting and most commonly traded. CBS-A designates the shares with voting rights. What follows here, is applicable to the CBS (non-voting) shares.
CBS Corporation is a large cap, trading at about $26.64, which is some 15 times trailing twelve month earnings. The price/earnings growth ratio is a very respectable 0.65 and a price to book of 1.70 is the third side of the value stock triangle. Return on equity is less than breathtaking at 12.54%, and year-over-year quarterly revenue growth is even less so at 2.10%. The picture brightens slightly with year-over-year quarterly earnings growth of 6.60%. The outlook gets brighter still with a debt/equity ratio of 60.53 and a current ratio of 1.38. More good news—a dividend yield of 1.40% well supported by a payout ratio of 17%. CBS led the week ending December 4th, 2011, in total viewership. Trading at just about a buck and one-half above its 200 day moving average it is attractive indeed.
Churchill Downs, Inc. (CHDN) is a small cap trading at about $49.22. Churchill Downs officially opened in 1875 and was incorporated in 1928. It is, of course, the home of the world renowned Kentucky Derby. Its trailing twelve month price/earnings ratio is 15.15, and the price/earnings growth ratio is 2.44. Price to book is 1.36; all decent fundamentals.
Return on equity is just okay at 9.50%, and year-over-year quarterly revenue growth is laudable at 12.70%, with year-over-year quarterly earnings growth at 441.14%, which is impressive indeed.The debt/equity ratio is very good at 28.43, but CHDN has a puzzling, fractional current ratio of 0.92. The stock is trading within pennies of its 52 week high, but the analysts’ target is $65.00—so place your bets.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.