In earlier articles, I have expressed my bullish sentiment on media. This industry is surprisingly more recession-proof than the market acknowledges. While media companies typically have high betas, they are almost a staple in lowly economic times. Since I first promoted Disney (DIS) as a "buy" around four months back here, the stock has appreciated by 22.7%, beating the S&P 500 by 1,180 basis points. Slightly more than a month later, I argued here that CBS was going to surge - it did so at a return of 7.6%. Based on my multiples analysis and DCF model, I find that both companies still have some upside left but have largely closed the discount.
From a multiples perspective, Disney is the cheaper of the two. It trades at a respective 15.2x and 11.5x pas tanned forward earnings. Though it may be rated between a "hold" and a "buy" while CBS is rated a "buy", the company has the top brand, less volatility, and a slightly higher dividend yield at 1.6%. More expensive than both of these companies is News Corp (NWSA), which is rated a "buy" and trades at a respective 16.6x and 11.1x past and forward earnings.
At the third quarter earnings call, CBS' CEO, Leslie Moonves, noted yet another quarter of strong performance:
"For many quarters now, we have posted results that speak to the strength, stability and progress of our company. Today's numbers are no exception, and the good news is that due to our performance, the strategic actions we've been taking and our ability to take advantage of the fundamental shifts in our industry, we are positioned for continued success going forward, including in 2012, which promises to be a very, very good year.
Our competitive position is as strong as ever. And as one of the world's leading content companies, the ways we are monetizing our programming are growing all the time, from retrans to reverse comp to streaming to our expanding international business. All of these new opportunities mean increased stability to our revenue base and more and more dollars falling to the bottom line".
During the third quarter, EPS soared 43%, OIBDA margins reached peak levels, boosted dividends, and management announced that it will be repurchasing $1.5B more worth of shares. The company is a ratings machine with the first 6 weeks of the season featuring 9 of televisions' top 10 scripted series. This strength has shown by the growth in viewership from broad demographics. Defying the assumption of the industry's cyclicality, CBS has been the leader for 9 years over the last decade.
It has already been noted how management continues to be shareholder-friendly. But execution can only come from strong free cash flow drivers - fortunately, the business has that too. 2 Broke Girls has been a total hit and HBO continues to grow fast. The recent agreement with Apple (AAPL) to offer tablet editions for print subscribers will further establish greater certainty.
Consensus estimates for CBS' EPS are that it will grow by 70.3% to $1.89 in 2011 and then by 19.6% and 15% more in the following two years. Assuming a multiple of 14x and a conservative 2012 EPS of $2.17, the rough intrinsic value of the stock is $30.38, implying 9.5% upside. Modeling a CAGR of 32.8% for EPS over the next three years and then discounting backwards at a WACC of 9% yields a similar figure of $32.18.
Disney, in my view, has even stronger upside given the enduring brand and sustainable cross-selling opportunities. Parks and cable networks may make up around three-quarters of the business in economic value, but they are strong promotion vehicles for everything Disney. The media business recently signed a 10-year affiliate renewal with Comcast (CMCSA) for all of the cable networks. In regards to this, ESPN has created strong barriers to entry with its dual-side revenue of affiliate fees and advertising. As Disney Channel has proven to be tremendously successful, I expect Disney Junior to also prove itself a catalyst. Many investors are concerned about the capital expenditures at parks. It should be noted that this is likely to peak sometime this year. Throughout the years, Disney has worked on building a solid brand and the investments it has made in parks, however seemingly extravagant, has made them a go-to spot for vacationers. As long as past trends hold true - and I expect them to - more capex, not less, is a step in the right direction.
Consensus estimates for Disney's EPS are that it will grow by 14.6% to $2.91 in 2012 And then by 14.4% in both of the following two years. Assuming a multiple of 14x and a conservative 2013 EPS of $3.26, the rough intrinsic value of the stock is $45.64, implying 18.9% upside. Modeling a CAGR of 14.47% for EPS over the next three years and then discounting backwards at a WACC of 9% yields a similar figure of $48.22. This upside may not be too significant, but it is not going to close any time soon.