Still optimistic on Disney
Several months after the multi-billion dollar acquisition of Lucasfilm, The Walt Disney Company (NYSE:DIS) is already planning a new trilogy and numerous spinoffs for characters like Han Solo and Yoda. The first new film is scheduled for a 2015 release. The franchise will now bring in massive recurring business — a new film will be released every 2-3 years.
Since Disney now holds all rights on all Star Wars divisions, including LucasArts and Obsidian Entertainment, the company is now in talks to revive the original trilogy through a series of games.
Thus, while investors have largely complimented the transaction, not enough attention has been given to the synergistic value. Increasing scale for the sake of empire-building is not necessarily creating value. By contrast, Disney will be rolling the Star Wars brand into video games, movies, shows, licensing, theme parks, and you name it. Disney offers a breadth of business opportunities that are just not possible for Lucasfilm to pursue alone.
On Feb. 5, Disney reported its first-quarter 2013 earnings, which showed a year-long increase of 5% to $11.3 billion — beating expectations by $560 million. At around 19.4 times forward earnings, the stock is getting fairly expensive.
Thus, the main reason to go with Disney at this point has more to do with stability and predictability than value. The most recent price target out by RBC Capital Markets puts a $71 price target on the stock, which indicates only 10% upside.
Avoid CBS; consider competitor
CBS Corporation (NYSE:CBS) finished 2012 with quarterly revenue growth of only 2% year over year — missing expectations by $30 million. EPS of $0.64 came out 6 cents behind expectations. To offset, CBS Corporation (NYSE:CBS) announced a $1 billion buyback plan for 2013, which just about doubles what was returned through repurchases last year. And the company has also announced plans to explore programming deals with Intel’s web-based TV service that is about to enter the market.
Analysts forecast CBS Corporation (NYSE:CBS)’s EPS growing by 9.9% over the next five years. Assuming expectations are met, 2017 EPS will come out to $4.50.
At a multiple of 15x, this translates to a future stock value of $67.50. Discounting backwards by 10% yields a present value that is 17% above the current market value. For a stock that has more than double the volatility of the S&P 500 and is near a 52-week high, CBS is not attractive right now.
I recommend a cheaper and more stable firm to balance the risk inherent in CBS Corporation (NYSE:CBS). Comcast Corporation (NASDAQ:CMCSA) trades at 19 times past earnings and has grown profits by the double-digits over the past five years. Analysts rate it a 1.9 out of 5, where “5” is a “buy,” so the wind is certainly in your favor if you choose to invest. Further, the beta is comparatively low at 1.1 and margins are positioned to improve from increased self-installations.
Conclusion
Media stocks have risen dramatically. Disney, which has been stuck in the $35 range for over a decade, is now at around $64 and still positioned to appreciate. The company’s successful CEO recently got his contract extended, which adds more certainty to the growth story. In my view, CBS’ outperformance in the last 52 weeks has been overdone, given that Disney has done more to innovate and move beyond the core brand. For this reason, I strongly recommend weighting your portfolio more toward Disney.
The article Avoid CBS and Buy This Media Stock Instead originally appeared on Fool.com and is written by David Gould.
David Gould has no position in any stocks mentioned. The Motley Fool recommends Walt Disney (NYSE:DIS). The Motley Fool owns shares of Walt Disney. David is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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