Discovery Communications Inc. (DISCA), Time Warner Inc (TWX): Buy These Media Companies

The revenue hiker

For Q1 2013, CBS posted the best quarter ever in its history, with significant growth in operating income before depreciation and amortization (OIBDA) and EPS (a 24% increase compared to Q1 of 2012). The operating margin was at 21.7% for the trailing-12 months, continuing a trend of incremental growth for the last several years. Earnings-per-share growth has been impressive, with $1.04 in 2010 more than doubling to $2.39 in 2012 (and a big spike from Q1 2012 EPS of $0.54 to Q1 2013 EPS of $0.69).

CBS also has a compelling programming story, with NCIS, Elementary, and 60 Minutes all leading in their respective categories. CBS is also winning young and middle-aged adult demographics (ages 18 to 49 and 25 to 54) and is the most-watched channel in the U.S. Management is very confident in their lineup and market share, and they will be raising advertising prices in a range “from high-single to low-double digits,” according to CEO Leslie Moonves, marking the second-straight year of a significant increase in advertising revenue.

Foolish conclusion

With three excellent market leaders like Discovery Communications Inc. (NASDAQ:DISCA), Time Warner, and CBS to choose from, there’s no need to take riskier choices in the media sector. For example, as Twenty-First Century Fox Inc (NASDAQ:FOXA) is a new company (having recently been spun-off from News Corp (NASDAQ:NWSA)), I would like to see how management operates independently before considering jumping in. While there is some great upside potential (according to Morningstar, the P/E ratio for the trailing-12 months is 12.1), there’s no need to take a risk on a new company when the established players have been so successful.

If I had to rank the companies, I would view Discovery as the best play due to programming uniqueness, expansion into new markets (in part through purchasing various companies), and operating margins. Time Warner and CBS both offer a dividend, which is a plus, but they offer similar programming and are more likely to cannibalize each other. All three are  worth buying – pick your thesis and watch it pay off.

The article Buy These Media Companies originally appeared on Fool.com and is written by Michael Douglass.

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