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Bernstein's Bet on Growth Over Buybacks: Media Roundup

NEW YORK (TheStreet) -- Disney (DIS), 21st Century Fox (FOXA), AMC Networks (AMCX) and Discovery Communications (DISCA) are poised for international growth making them better buys for investors than media rivals lifted in recent quarters in part by aggressive share buyback programs, said Bernstein Research in a report led by media stocks analyst Todd Juenger.

Media companies that have secured international pay-TV contracts are likely to grow at higher rates than entertainment companies that rely largely on a U.S. domestic market that is becoming increasingly competitive and therefore, fragmented. In three years, Juenger said, there will be fewer cable and satellite-TV subscribers than there are today.

Concurrently, the impact of share buybacks from companies such as CBS (CBS), Viacom (VIAB)and Time Warner (TWX)will slow as cash flow yields decline. A deceleration in cash flow will have the related effect of lowering dividend yields, giving executives at these companies less of a reason to push for share buybacks, according to Bernstein Research.

As these two diverging trends play out, investors are faced with deciding whether CBS, Viacom and Time Warner have finally become overvalued. At present, all three companies are trading at their highest valuation in more than three-and-a-half years on the basis of price to estimated 12-month earnings, according to data compiled by Bloomberg.

Investors in CBS, Viacom and Time Warner have done quite well since February 2010, dispelling concerns that Big Media companies would be unable to adapt to the migration of viewers to the Internet amid the surge in mobile communications. CBS shares have skyrocketed 328% over the last three years while Viacom jumped 189% and Time Warner added 137%. In addition to securing attractive re-transmission agreements from pay-TV operators, billions of dollars spent in stock buybacks also have helped to propel their shares.

Disney and 21st Century Fox are also trading at recent highs on a similar basis of price-to-estimated earnings. Yet these two media heavyweights have been rapidly expanding their offerings in faster-growing foreign markets. International box office sales, especially from countries such as China, are helping Disney and Fox sustain their growth.

Fox has also expanded further into premium sports offerings. The company controlled by Rupert Murdoch just signed a multi-year agreement to show the much-followed but infrequently seen soccer games of Germany's Bundesliga to its viewers in Asia, Europe and the Americas. The deal, made public this weekend, begins with the 2015-16 season with a pledge to air all 306 matches.

Juenger said he sees "valuations more relatively attractive for the Growers," Disney, Fox, Discovery and AMC.

--By Leon Lazaroff in New York

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