Four leading performers for the best entertainment media play

Traditional media conglomerates are now competing against disruptive digital media powerhouses.

Vikram Barhat 24 January, 2018 | 6:00PM
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It's the time of year when things in the entertainment world start to kick into high gear. The 75th Golden Globe Awards earlier this month marked the onset of the movie awards season. A celebration of cinematic excellence, the Globes are also regarded as a reliable precursor to the British Academy of Film and Television Arts (BAFTA) and the Oscars.

Although film awards ceremonies are often used as a platform for social and political activism, their overarching purpose undeniably is to promote and showcase art, creativity, talent and, by association, companies that create and commercially benefit from entertainment content.

In a landscape fast being reshaped by technology, demography and social trends, the traditional media conglomerates are now competing against disruptive digital media powerhouses considerably more nimble and clued into changing consumption patterns. Some of these players, traditional and newcomers, may present attractive investment opportunities as they tweak their business models to better align with market trends and consumer demands.

These companies have the resources, expertise and agility needed to stay ahead of the curve. They are making quality, binge-watch-worthy content, reeling in both commercial success and critical acclaim. The frontrunners in the space are also ramping up their original content programming to build or bulk up reservoirs of media content that provide them profit and protection in various economic conditions.


CBS Corp Class B
Ticker: CBS
Current yield: 1.20%
Forward P/E: 11.9
Price: US$58.75
Fair value: US$71
Data as of Jan. 19, 2018

U.S. media conglomerate  CBS Corp. (CBS) owns an eponymous television network, 30 local TV stations and 50% of CW, a joint venture between CBS and Time Warner. The company, which owns Showtime, CBS Radio and Simon & Schuster, spun off its cable networks and movie studios to Viacom in 2006.

"CBS derives a sustainable competitive advantage from its entertainment segment (more than 50% of EBITDA)," says a Morningstar equity report. "Given our overarching premise that the value of quality content will continue to increase, the television production studio is the most attractive asset in the entertainment segment."

The studio has produced hit programs such as CSI and NCIS, and later their spin-offs CSI: Miami and NCIS: Los Angeles, that generate multiple cash flows across different windows including cable syndication, online and DVDs, adds the report.

"We expect the company to increase the percentage of content on the broadcast network created in house (currently 40%) to fully capture the multiple cash flows that a hit show can produce," says Morningstar equity analyst Neil Macker.

A combination of highly rated original programming and exclusive sports rights, which include the NFL and college football, will allow CBS to sharply increase its revenue from retransmission fees and reverse compensation in the near future, adds Macker, who pegs the stock's fair value at US$71, incorporating a price/earnings ratio of about 17 times. Morningstar projects annual top-line growth of 4.3% through 2021, annual revenue growth of 3.8% for its entertainment segment, and 3.8% for its cable networks.


Walt Disney Co.
Ticker: DIS
Current yield: 1.47%
Forward P/E: 16.1
Price: US$110.20
Fair value: US$130
Data as of Jan. 19, 2018

The House of Mouse,  Walt Disney (DIS) owns globally recognized Mickey Mouse and Buzz Lightyear characters, and makes films under the Pixar, Marvel and Lucasfilm banners. The entertainment powerhouse also operates media networks including ESPN, ABC and Disney Channel, several television production studios, theme parks and resorts, and other assets.

"The stable of animated franchises will continue to grow as more popular movies get released by the animated studio and Pixar, which has already generated hits such as Toy Story, Cars and most recently Frozen," says a Morningstar equity report.

Incidentally, Disney Pixar's film Coco bagged this year's Golden Globe Award for Best Animated Motion Picture, and has been nominated for the upcoming ‘British Oscars', BAFTA Film Awards, under the animated film category.

A key component of Disney's media networks segment is ESPN, which has exclusive rights to broadcast premier sporting events from the NFL and college football, and "profits from the highest affiliate fees per subscriber of any cable channel and generates revenue from advertisers interested in reaching adult males ages 18-49, a key advertising demographic," says the report.

In a digital push, Disney is buying entertainment assets of Fox, including the Fox television and movie studios, cable entertainment networks, subject to regulatory approval, says Macker, whose US$130 fair value for the stock implies price/earnings of approximately 19 times.

The wide-moat media major also benefits from "attractive economics as its programming consists of internally generated hits with Disney's vast library of feature films and animated characters," says Macker forecasting average annual top-line growth of about 4.1% through fiscal 2022 and 4% annual growth for the filmed entertainment segment.


Twenty-First Century Fox Inc. Class B
Ticker: FOX
Current yield: 1.01%
Forward P/E: 15.7
Price: US$35.93
Fair value: US$43
Data as of Jan. 19, 2018

Media behemoth  Twenty-First Century Fox (FOX) owns a film studio, which creates television programs and movies; broadcast television, including the Fox broadcast network and local TV stations; cable networks, which comprise over 300 channels globally; among other media assets.

This year's Golden Globes night truly belonged to Fox studios. Of the 14 awards for motion pictures, seven were scooped up by Fox (six went to Fox Searchlight and one to 20th Century Fox), not including the two TV awards for 20th Century Fox productions.

"Fox enjoys strong competitive advantages based on its worldwide cable networks, along with its film and television studios," says a Morningstar equity report. "The Fox broadcast network [which holds the rights for the NFL, college football and MLB] provides the company with an important platform for showcasing content as broadcasters are the only outlet to reach almost all 116 million households in the U.S.

The company's sustainable competitive advantage is rooted in robust film franchises and a strong television production studio. "The filmed entertainment segment generates a number of hit television programs and movies annually, [while] Fox News remains the market leader in news, and its recent growth has turned it into one of the 10 most-watched cable channels," says Macker, who recently upped the stock's fair value from US$35 to US$43.

The combination of original programming and exclusive sports rights will allow FOX to sharply increase its revenue, which Macker forecasts will increase at 4% annually from 2018 through 2022, fuelled by annual growth of cable networks (5%), filmed entertainment (1%), and television (4%) segments. Inc.
Ticker: AMZN
Current yield: -
Forward P/E: 142.9
Price: US$1,297.34
Fair value: US$1,250
Data as of Jan. 19, 2018

The world's highest-grossing online retailer, (AMZN) was responsible for 44% of all U.S. e-commerce sales in 2017. The firm's media products account for 18% of sales, electronics and general merchandise make up 72%, while the other 10% is derived from Amazon Web Services, advertising, and cobranded credit cards. Last year, the company acquired grocery chain Whole Foods.

Amazon has been pouring billions of dollars on creating and acquiring TV shows and films to bulk up its content offering, according to Reuters. The bet seems to be paying off. This year, Amazon's period comedy The Marvelous Mrs. Maisel scooped up two Golden Globes including Best Television Series, and Best Performance by an Actress in a television Series, which went to Rachel Brosnahan who plays the show's leading character.

Amazon last year bought the global television rights to The Lord of the Rings, to produce a multi-season series based on the movie franchise, says another Reuters report.

More than 360 million global active users, technology, and content investments conspire to create Amazon's robust competitive advantage. These factors which will continue to "reshape retail, digital media, and enterprise software for years to come," says Hottovy, who forecasts revenue to grow at 24% annually through 2021, with contributions from Whole Foods, greater engagement among Amazon Prime members, digital content sales, and international expansion.

Impressed by Amazon's accelerating growth trends, Morningstar sector strategist R.J. Hottovy recently increased the stock's fair value from US$1,200 to US$1,250. Amazon warrants a premium valuation based on its wide economic moat, growth prospects, and long-term margin expansion potential, he adds.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating Inc147.73 USD0.67Rating
Paramount Global Class B14.15 USD-0.42Rating
The Walt Disney Co95.17 USD-0.93Rating

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.

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