Friday, November 11, 2011

Watch CBS, Disney Make Your Portfolio Grow

In an economy that's hardly booming, it would seem that people would want to watch TV and go to movies to take their minds off economic hardship. But an entertainment company would need to produce compelling content to snag a big share of those potential viewers.

And if they could, would advertisers be willing to spend to reach them or would they figure that consumers don't have the money to buy their products so why should they bother? These questions come to mind in considering the financial performance of the entertainment industry these days. And here's another: If the entertainment industry is doing well, should you invest in Walt Disney (DIS) and CBS (CBS) -- two of its biggest participants?

These companies get revenues from TV advertising and movies, among other sources. But a look at global TV advertising revenues suggests it's a big market that's growing solidly. According to ZenithOptimedia, advertising revenue on TV was expected to grow at a 2.4% compound annual rate to $191 billion by the end of 2011 and 6% more in 2012 to $202 billion. That would make the market for TV advertising more than twice as large as the second biggest one -- newspaper ads.

The market for movies is much smaller but growing far faster. Pricewaterhousecoopers expects 2011 North America film revenues to hits $40.8 billion in 2011 and to rise at a 5.4% annual rate to $50.3 billion by 2015. And globally, the film industry is growing faster -- 6.2% annually -- from $88.8 billion in 2011 to $113.1 billion in 2015.

Both industries are growing because of more people in emerging markets such as China, India, and Brazil who are watching TV and going to movies.

When Disney reported its fourth quarter earnings Thursday, it blew through estimates on the strength of its other businesses -- cable TV and at U.S. resorts. Specifically, according to Bloomberg, Disney's profit rose 20% in the quarter. Its sales climbed 7% to meet analysts' estimates of $10.4 billion while its adjusted EPS of 59 cents a share beat estimated by four cents. 

Disney benefited most from three factors: fees from pay-TV operators rose, ESPN ratings were up 13% and Disney resorts charged higher ticket prices and added a new cruise ship.

CBS's third quarter report, issued Nov. 3, was not quite as strong. Its net income spiked 38% to $338 million. Its $0.50 per share beat by four cents EPS expectations but its 2% increase in revenue to $3.37 billion fell $60 million short of Wall Street forecasts.  While its advertising revenue held steady at almost $2 billion, CBS received higher licensing and affiliate fees in the quarter.

So here's what the investment choice between DIS and CBS boils down to:
  • Disney: slow growth, strong margins; fairly priced stock. Disney's sales have increased 7.4% in the past 12 months to $41 billion while net income rose 21% to $4.8 billion – yielding a 12.9% net profit margin. Its PEG of 1.03 (where a PEG of 1.0 is considered fairly priced) is reasonably valued on a P/E of 14.68 and expected earnings growth of 14.3% to $3.30 in fiscal 2013.
  • CBS: Decent growth, small margins; cheap stock. Revenues for CBS have grown 8% in the past 12 months to $14 billion while net income jumped 220% to $1.22 billion – yielding an 8.77% net profit margin. Its PEG of 0.75 is pretty cheap on a P/E of 14.24 and expected earnings growth of 18.89% to $2.24 in 2012.
Both of these entertainment companies are performing well and Disney shares are poised to pop in Friday trading. But due to its low PEG, CBS looks like the better value if it keeps beating EPS growth expectations.


Post a Comment

<< Home