There's plenty of action brewing in the film awards circuit. The annual award season that kick-started with the Golden Globes has wound its way to culminate in the 89th edition of the annual Academy Awards, the highest honours in filmmaking, popularly known as the Oscars, this past weekend.
Not just a star-studded celebration of cinematic art, the event serves to put a spotlight on the commercial success of companies that produce and profit from entertainment content. In a fast-changing landscape -- politically, technologically and cinematically -- some of these companies have managed to stay ahead of the curve. They have the pulse of changing consumption patterns and are rich in resources needed to stay relevant throughout the globe and across generations.
As businesses built on strong fundamentals and strategic business mix, the following movie stocks may present attractive long-term investment opportunities. These enterprises are sitting atop deep reservoirs of content and own sprawling media networks. Moreover, they are rapidly innovating to rule, resist, or ride out the next wave of disruption so as to maintain and grow their dominance and bottom line, according to Morningstar equity research.
Walt Disney Co. | ||
Ticker | DIS | |
Current yield | 1.35% | |
Forward P/E | 16.2 | |
Price | US$110.23 | |
Fair value | US$134 | |
Data as of Feb. 27, 2017 |
The entertainment titan Walt Disney Co. (DIS) produces motion pictures (under labels like Pixar, Marvel and Lucasfilm), television shows and music. It owns and operates media networks including such household names as ESPN, ABC and Disney Channel, as well as television production studios, and theme parks and resorts.
"Over the past decade, Disney has demonstrated its ability to monetize its characters and franchises across multiple platforms -- movies, home video, merchandising, theme parks, and even musicals," says a Morningstar report.
The company's animated franchises, including hits like Toy Story, Cars and Frozen, "will continue to grow as more popular movies get released by the animated studio and Pixar," says Morningstar equity analyst Neil Macker in a report.
Disney's wide economic moat is built on its media networks and Disney-branded businesses that have demonstrated strong pricing power over the years. The company recently hiked admission prices at its U.S. theme parks, its second largest division, by 4.9% to goose revenue.
"Disney's theme parks and resorts are almost impossible to replicate, especially considering the tie-ins with its other business lines," says Macker, whose US$134 fair value of the stock puts it in the four-star range. "The stock may offer an attractive entry point for investors with a longer-term investment horizon."
Macker's forecast includes 3% annual sales growth from the media networks, 6% for parks and resorts over the next five years, and 3% for the filmed entertainment segment spurred by the Star Wars franchise that "broadens the demographics that the company can address," he says.
Time Warner Inc. | ||
Ticker | TWX | |
Current yield | 1.64% | |
Forward P/E | 14.8 | |
Price | US$98.20 | |
Fair value | US$96 | |
Data as of Feb. 27, 2017 |
Media and entertainment conglomerate Time Warner (TWX) owns a galaxy of TV networks including HBO, CNN and TNT. Its filmed entertainment segment includes Warner Bros. and New Line Cinema, studios that combine to form the largest filmmaker in the world.
Time Warner, which is set to become part of AT&T in an US$85.4 billion deal, ended 2016 on a strong note as revenue jumped 7% year over year to US$2.8 billion, supported by a 14% increase in subscription revenue. Warner Bros. revenue grew by 17%, driven by theatrical revenue growth of 29%, due in no small part to Fantastic Beasts and Where to Find Them, which "grossed over US$800 million globally," says a Morningstar report. "With four planned sequels, the J.K. Rowling-penned movie appears to be the next global film franchise for Warner Bros."
It is one of six major film studios and one of the largest producers of television content. Warner Bros.' film library contains classic films, recent hits and movie franchises. Its TV production holds a vast array of content including hits such as The Big Bang Theory.
"We believe demand for quality content from the broadcast and cable networks along with OTT providers will only intensify, ensuring steady cash generation from both new and old programming," says Macker, who pegs the stock's fair value at US$96. His forecast includes overall average annual revenue growth of 3.4% through 2020, and expansion of operating margin from 24.7% in 2015 to 26.5% in 2020.
Viacom Inc. B | ||
Ticker | VIAB | |
Current yield | 2.76% | |
Forward P/E | 10.4 | |
Price | US$43.50 | |
Fair value | US$53 | |
Data as of Feb. 27, 2017 |
A premium entertainment brand, Viacom (VIAB) creates TV content and motion pictures. The firm's more than 200 TV channels reach about four billion subscribers across more than 180 countries. Viacom's key assets include winning brands like Nickelodeon, MTV, Comedy Central and VH1. It also owns a film studio, Paramount Pictures, and a library of 2,500 films that features blockbusters like The Godfather and the Transformers series.
Bouncing back from a disappointing 2016, Viacom posted strong quarterly earnings this year. It reported Q1 revenue of US$3.32 billion, up 5% year over year, boosted by a 24% jump in film studio revenue, a 5% growth in media networks, with affiliate revenue edging up 2%, according to a Morningstar report.
As part of Chief Executive Bob Bakish's turnaround plan, Viacom is pushing to "revitalize and elevate its approach to content and talent, deepen partnerships to drive traditional revenue, make big moves in the digital and physical world and to continue to optimize and energize the organization," says Macker, who appraised the stock's worth at US$53.
The company's impressive slate of films for 2017 includes the Vin Diesel action film XXX: Return of Xander Cage, released earlier this year, which grossed a whopping US$20.3 million on opening day in China according to Forbes, and the upcoming action-comedy Baywatch. That both movies cast Indian actors in prominent roles shows the company's growing focus on large markets like India and China.
Twenty-First Century Fox Inc. Class B | ||
Ticker | FOX | |
Current yield | 1.1% | |
Forward P/E | 14.0 | |
Price | US$30.01 | |
Fair value | US$35 | |
Data as of Feb. 27, 2017 |
Twenty-First Century Fox (FOX) is a diversified media behemoth whose bouquet of assets includes a film studio, broadcast television including the Fox network in the U.S., and cable networks consisting of more than 300 channels globally.
The parent of the 20th Century Fox film studio posted a 27% increase in profit and 4% rise in revenue for the most recent quarter, driven by stronger advertising and affiliate fees at its broadcast and cable-television segments, according to a Morningstar report.
"20th Century Fox owns both robust film franchises and a strong television production studio, both of which are important given our premise that the value of quality content will increase," says Macker.
The media content company enjoys strong competitive advantages built on its worldwide cable networks, and its film and television studios that generate a number of hit television programs and movies annually.
The film studio, known for churning out smash hits like Deadpool, Avatar and Mission Impossible, has a slate of 10 movies due out this year, which could contribute significantly to the overall revenue. On the small-screen side, the firm has produced a slew of global blockbuster TV shows like Modern Family and Homeland.
Further, Macker says: “The combination of original programming and exclusive sports rights will allow Fox to sharply increase its revenue from retransmission fees and reverse compensation in the near future.”
He assigns the stock a fair value of US$35 and projects the firm's total revenue to grow at 5% from 2016 through 2021.
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