And the award for best production stock goes to

With the Golden Globes kicking off awards season, here’s a look at four entertainment companies that won big, two undervalued and two overvalued, that are in focus

Vikram Barhat 16 January, 2019 | 6:00PM
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The 76th Golden Globes earlier this month ushered in the awards season that celebrates the best in filmmaking. The high-profile events on the circuit include the upcoming British Academy of Film and Television Arts (BAFTA), and the Academy Awards, or the Oscars.

Not only do these events showcase the craft of cinema making and individual talent, they also create a buzz around leading production houses that generate this content. Some of these companies deserve a closer look as attractive investment opportunities for long-term investors.

Whether legacy entertainment behemoths or their cash-rich digital rivals, these businesses have a good grasp of changing consumption patterns and are quick to adapt to social, political and technological changes. With sound fundamentals and strategic business mix, these enterprises boast vast reservoirs of content, a roaster of top talent, tech expertise and global reach. Such attributes help them survive, surmount and stave off wave after wave of disruption and maintain industry dominance, according to Morningstar equity research.

Twenty-First Century Fox Inc. Class B
Ticker: FOX
Current yield: 0.74%
Forward P/E: 22.6
Price: US$48.48
Fair value: US$46
Value: 5% Premium
Data as of Jan. 09, 2019

A diversified media powerhouse, Twenty-First Century Fox (FOX) produces and distributes movies and TV shows. The company owns a wide range of assets including a film studio, global cable networks, and broadcast television including the Fox network.

This year’s Golden Globes night was dominated by Fox with a total of 12 nominations, 10 for Fox Searchlight Pictures and another two for 20th Century Fox. The company scooped up awards for best drama and best actor categories for Bohemian Rhapsody, best actress in a motion picture, musical or comedy for The Favourite, and best television series, drama for The Americans, among other awards.

The wide-moat media and entertainment giant’s cable networks segment contains several leading franchises, including news and sports.

“The critical acclaim of its studio-produced content, along with the studio’s willingness to sell shows to the right distributor, creates a virtuous cycle in which the creators of its hit shows have an incentive to launch new shows with the studio and the strong ratings attract other creators to the platform,” says Morningstar equity analyst Neil Macker, who puts the stock’s fair value at US$46.

Fox is looking to sell many of its assets including television and film studios to focus on news and sports programming. A recent deal with Disney is likely to get regulatory approval, says Macker.

Comcast Corp Class A
Ticker: CMSCA
Current yield: 2.13%
Forward P/E: 12.8
Price: US$35.92
Fair value: US$42
Value: 15% Discount
Data as of Jan. 09, 2019

Comcast (CMCSA) is the largest U.S. cable operator serving 58 million homes. The company’s assets include national and regional cable networks (USA, MSNBC, and CNBC) theme parks, Universal Studios and DreamWorks Animation studio, under the banner of NBCUniversal.

This year, Universal’s comedy-drama Green Book bagged three wins at the Globes, in the best comedy, best supporting actor, and best screenplay categories. The studio, which had seven nominations in all, also took home the best original score award for First Man.

Comcast has invested about US$13 billion in the NBCU segment to acquire theme park assets, real estate, and the DreamWorks Animation studio. The move paid off as the segment’s EBITDA has more than doubled during seven years of Comcast control.

“Comcast has modelled NBCU on Disney, investing heavily to create and bolster core content franchises, like Jurassic World and Despicable Me, while building multiple outlets to monetize and reinforce the popularity of this content,” says Morningstar sector director, Michael Hodel, who appraises the stock’s worth to be US$42.

Comcast’s sustainable competitive advantage, though, stems from its core cable networks segment, particularly internet access, where the firm has been steadily expanding market share, driving cash flow sharply higher, says a Morningstar equity report. Inc
Ticker: AMZN
Current yield: -
Forward P/E: 59.17
Price: US$1664.80
Fair value: US$2200
Value: 25% Discount
Data as of Jan. 09, 2019

Among the world’s highest-grossing online retailers, Amazon (AMZN) rang up US$178 billion in net sales in 2017. The company, that briefly topped US$1 trillion in market value last year, produces and procures movies and TV shows through its subscription-based Amazon Prime Video service.

Amazon snagged two awards at the recent Globes winning best supporting actor for A Very English Scandal and best actress in TV series for The Marvelous Mrs. Maisel. The digital giant has been investing heavily in fulfillment infrastructure in North America and a vast portfolio of audio and video content, to bulk up its competitiveness.

“Amazon will continue to develop into a formidable player in digital media, given its vast content offerings,” says Morningstar sector strategist, R.J. Hottovy, who puts the stock’s fair value at US$2,200, supported by growth assumptions for advertising and subscription services.

Amazon has been particularly aggressive in expanding its services to new markets, producing original content locally in emerging markets like India where video consumption is skyrocketing, fuelled by cheaper phones and improved internet connectivity.

Netflix Inc
Ticker: NFLX
Current yield: -
Forward P/E: 76.92
Price: US$322.25
Fair value: US$120
Value: 167% Premium
Data as of Jan. 09, 2019

Video-streaming giant Netflix (NFLX) started the global trend of ‘binge watching’ and has racked up more than 130 million paid subscribers worldwide. The company has grown to become a serious contender as a filmmaker, investing as much on content as legacy media houses.

At the Golden Globes, the company won two trophies for Roma (best foreign language film and best director), two for the TV series The Kominsky Method (best TV series and best actor for TV series) and another for TV drama Bodyguard (best actor for TV series).

Thanks to its large subscription base, Netflix has amassed enormous user data that it exploits to derive sustainable competitive advantages both at home and global markets.

The streaming heavyweight has been briskly expanding its international footprint and has been ramping up original programming for local markets. “While growing rapidly as a streaming video provider, the company understood the need to create original content to differentiate its offering,” says Macker, who pegs the stocks worth at US$120.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating Inc120.11 USD4.44Rating
Comcast Corp Class A39.48 USD1.00Rating
Netflix Inc378.88 USD5.54Rating

About Author

Vikram Barhat

Vikram Barhat  A Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry, Vikram also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.