When it comes to buying a media business, investors should look for those with solid diversification across a variety of distribution channels, a leading brand name, and not be focused on the quarter-to-quarter ratings changes. Sirius XM (SIRI), Disney (DIS), and CBS (CBS) all are well positioned in the sector and, though consumer preferences are largely unpredictable, they have the scale necessary to not only adapt to their environments but to also mold it. Few businesses have that kind of influence over humanity and, thus, I recommend buying shares in all three. Below, I go through the fundamentals of each stock.
Needless to say, but important in its implications, Sirius is one of the hottest stocks on the Street. It has generated an average 36M shares worth of trading each day over the past month, which makes it highly susceptible to "crowd mentality". With a beta of 2.1 and a low stock price, Sirius stands to either generate abnormally high or low returns for shareholders.
In my view, the company is well positioned to provide the former. It has a virtual monopoly on the satellite radio business. The bears who contend that Pandora (P) will steal market share have failed to understand the kind of partnerships Sirius currently has with auto manufacturers. Greater car production from a rising economy will buoy up revenue and keep subscriber numbers on the up trend. And Ford has already trimmed its typically 2-week long shutdown to only one week. Chrysler has taken a similar number. At a 70% installation rate, Sirius is an unsuspecting play on an economic recovery, since more cars equals more revenue.
In media, brand is almost everything, and a firm like Pandora is attempting to reinvent the wheel while Sirius has gone with what works by bringing in top talent, like Howard Stern. But perhaps most importantly, investors have literally failed to factor in the value of Sirius's NOLs. Some fear Liberty Media's (LMCA) control on the business, but I actually see it as an opportunity for shareholders. Should the company end up buying out the near monopoly, it will provide substantial revenue synergies and come at premium in an otherwise uncertain economy.
Disney is one of my favorite companies on the Street due its successful history, top management, and impressive understanding of consumer trends. The company has established a brand like no other media business that appeals to all different age demographics. ESPN has carved out a niche in sports entertainment while the Disney Channel has carved out a niche in the tween market. When it comes to talent, Disney not only attract is but actually creates it. From Miley Cyrus and the Jonas Brothers, Disney has excited the market time and time again.
Fears about margin contraction at ESPN, rating challenges, and lack of visibility have not come to pass. Over the last 12 months, the company has soared 25.3% while the S&P 500 was up only 3.8%. At the same time, the company's parks are picking up quicker-than-expected while content costs for sports broadcasting have been contained by Disney's leading control. Faster growth across all segments, coupled with stability, make Disney a perfect stock for the defensive value investor.
Perhaps most importantly, I like how one segment of Disney complements the others. Children who grow up and watch Disney cartoons are likely to beg their parents to go to Disney World, and adults that go to Disney World are likely to buy Disney toys and films for the "family experience". With such a strong moat, I see less downside risk than upside reward for the company.
Compared to Sirius and Disney, CBS, in my view, is increasingly becoming regarded as "boring" in the media world. My personal belief is that this mentality has been overdone. CBS is forecasted for 14.1% annual EPS growth over the next 5 years. This means a future 2016 stock price of $58.85 at a 14x multiple. Discounting backwards by 10% yields a price target of $36.54, which is at nearly a 20% margin of safety. Thus, while CBS may not be the most undervalued stock, it offers a safe growth investment.
Showtime has continued to experience momentum from continued syndication while macro trends have unreasonably pulled back the stock. I am particularly attracted to the new CBS-programmed sports radio, which will run 24/7 across eight CBS stations. This will help put market share pressure on the leading sports broadcaster, Disney, and help attract back more media investors. I also believe that the fear that TV advertising is becoming a thing of the past is overblown. From paid promotions inside TV shows to ones between TV shows, advertisers have opted for the best of both worlds. As advertising revenue improves, risk discounting will thus come down and boost present valuation.
Disclaimer: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.