Disney Buyback Reflects Strength of Media Stocks: Media Roundup

NEW YORK ( TheStreet) - Blackouts, hacking scandals and threats to the pay-TV model be damned, the stocks of major U.S. media companies keep on rolling.

Led by Walt Disney ( DIS), CBS ( CBS) and 21st Century Fox ( KMX), the S&P 500 Media Index has gained 30% this year, easily outdistancing the S&P 500 composite, which has advanced a nothing-to-scoff-at 18%, poised for its best year since 1997.

Disney has benefited from the strength of advertising at ABC and fees paid to carry ESPN to beat analysts' earnings forecast in each of the past nine quarters. While the films group has underperformed, Disney said Thursday it will buy back $6 billion to $8 billion of its stock beginning next year, a reflection of the company's health. Shares of the world's largest entertainment company rose 2.4% to close at $65.49, extending its 2013 advance to 32%.

But Disney isn't alone. Media company stocks have been energized by steady and nearly unbroken increases in profits and sales. CBS, for instance, has beaten analyst quarterly forecasts in 15 of the past 16 quarters. Behind those numbers are trends that repudiate, at least for the short term, the notion that content producers would struggle in the age of portable electronic devices and increasing sources of programming.

Even after media company have hit record highs, their stocks are being valued just slightly higher than the benchmark S&P 500, which trades at 16.1 times members' earnings. In most cases, analysts view these shares as not yet too expensive. According to data compiled by Bloomberg, CBS and Viacom are trading at 19 times earnings while Time Warner posts a valuation of 17 times and Disney is at 20 times. Meanwhile, 21st Century Fox, by virtue of its split from News Corp. ( NWSA), comes in at a more weighty 40 times, according to Bloomberg data.

James M. Marsh, media analyst at Piper Jaffray, says media companies are successfully obtaining affiliate fees from local television station owners and retransmission payments from cable- and satellite operators. Netflix ( NFLX) and Amazon ( AMZN), the two biggest purveyors of video-on-demand programming, are being viewed as friendly rivals, rather than sharks intent on breaking the business model that has sustained content producers for 30 years.

"Investors feel like the model has been de-risked a bit," Marsh said in a phone interview in New York. "Eighteen months ago, two years ago, people were very concerned that new distribution windows would disintermediate the pay-TV ecosystem. But today, they feel much more comfortable that will be further down the road, and that in the interim it's going to be a new distribution channel, a new customer to sell content. The pendulum has shifted from high risk to a sense that the changes in the industry can be managed."

Indeed, the threat of widespread cord-cutting, i.e., pay-TV subscribers abandoning their average $120 monthly payments in exchange for a combination of online and box-top sources, has yet to have a destabilizing impact on media companies or their investors.

Viacom ( VIAB), owner of MTV and Nickelodeon, has surged 57% this year, while CBS, the most-watched television network, has jumped 43%, blasting through its four-week blackout with Time Warner Cable as if that unusually public tug-of-war was just another minor operating expense. (The same can't be said of Time Warner Cable ( TWC), whose incoming CEO Rob Marcus acknowledged this week at a Bank of America Merrill Lynch conference that the pay-TV operator lost subscribers as a result of the CBS blackout. Marcus didn't say how many customers were lost as a result of fracas.)

News Corp. has more than recovered from concerns that the U.K. hacking scandal that prompted Rupert Murdoch's company to close the London-based News of the World would hamper his legacy print company. News Corp. has gained 8.3% since Murdoch separated his television and film businesses in 21st Century Fox; the shares have gained 7.5% this year.

(To be fair to Time Warner Cable, it should be noted that its stock trades at 19 times earnings, an indication that investors still see plenty of value in its underlying business, even as total subscriber numbers decline.)

But the domination of major media companies means that their stocks have more to run, says Marsh, who has an overweight rating on CBS. Time Warner ( TWX) is rated a buy by 23 analysts and a hold by eight sell-side prognosticators, according to Bloomberg. 21st Century is rated a buy by 24 analysts, a hold by four with one sell recommendation. Marsh has a neutral rating on Viacom, a reflection of the view that the cable-TV network owner may have plateaued.

The media business may not be as much of a zero-sum game as industry observers once feared. Rather than viewing Netflix as a reverse indicator for the health of content producer stocks, Marsh argues that recent trends show that video-on-demand services can post good results without hurting media stocks. Netflix has gained an outlandish 226% in 2013 and trades at a gaudy 224 times earnings.

"Historically, when Netflix has done well, it's a measure of the increased risk profile of companies that benefit from that pay-TV eco system," Marsh said. "But as you see Netflix hitting 52-week highs again, it's interesting this time around that media companies are also hitting 52-week highs. The market is saying that Netflix can do well, but so can a Disney, Viacom and CBS."

-- Written by Leon Lazaroff in New York

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