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

Cable TV has done a great job of innovating to monetize the Internet through streaming and partnerships with companies like Netflix, Inc. (NASDAQ:NFLX) and, Inc. (NASDAQ:AMZN). I view three companies — Discovery Communications Inc. (NASDAQ:DISCA), Time Warner Inc (NYSE:TWX), and CBS Corporation (NYSE:CBS) — as great buys with lots of potential for future growth, and each satisfies a different thesis; (Discovery has the most unique content and best margins, Time Warner is a dividend play with solid growth prospects, and CBS has great advertising pricing power.) But if you have to buy one, stick with Discovery.

Discovery Communications Inc. (NASDAQ:DISCA)

The best of the best

Discovery Communications Inc. (NASDAQ:DISCA) had a great Q1 this year, with 6% growth in domestic viewership for Animal Planet (capping off over a year of consecutive monthly growth) and 50% growth in viewership for the Velocity channel. Internationally, viewership was up more than 12% year-over-year, which helped drive a revenue increase of 7% compared to Q1 2012.

Management anticipates revenue of between $5.7 billion and almost $5.8 billion, which would represent roughly a 20% jump from 2012 full-year revenue. Management projections for net income are for between $1.2 billion and $1.3 billion, representing a substantial increase from the $943 million in net income for 2012. EPS dipped in 2012 to $2.48 from $2.80 for 2011, but the 10% growth in EPS for Q1 2013 (from $0.57 to $0.63) indicates the company is on track for a solid year.

Both the recent acquisition of SBS and Discovery Communications Inc. (NASDAQ:DISCA)’s new 20% ownership interest in Eurosport point to a willingness to put capital to use to grow the business. The operating margin – which was 40% for the past 12 months and has been at 40% or higher since 2011 – indicates incredible profitability.

Discovery Communications Inc. (NASDAQ:DISCA) develops great content (Animal Planet, Man vs. Wild, Dirty Jobs, Storm Chasers, Myth Busters) which isn’t easily replicated. No other network holds an entrenched position in a unique space like Discovery. The stock isn’t cheap, with a P/E ratio of 28.5 (although the forward P/E is a much more palatable 16.7, according to Morningstar), but I see great long-term growth if the company continues the content innovation it has been practicing for the last several years. I’d buy it.

The dividend payer

Time Warner Inc (NYSE:TWX) is also posting some great financial numbers; although its operating margin isn’t as good as Discovery’s, management has posted solid improvement from the -34% operating margin for 2008 to a respectable 21.2% for the trailing 12 months. Revenue is flat, but EPS skyrocketed with $2.25 per share in 2010 growing to $3.09 for 2012 and $3.26 for the trailing-12 months.

Time Warner Inc (NYSE:TWX) is no slouch either when it comes to programming, with the rights to March Madness generating fantastic viewership. TNT and TBS are showing meaningful growth, with programs like King of the Nerds and Falling Skies leading the charge. Adult Swim leads with men aged 18 to 49, and HBO’s Game of Thrones is driving viewership for that network.

Time Warner doesn’t just do TV – Warner Brothers (a subsidiary) produced the successful Man of Steel Superman reboot, and the second film in the Hobbit Trilogy should drive revenue in the second half of the year. Time Warner Inc (NYSE:TWX) also owns Time, which publishes magazines like Time, People, and Sports Illustrated; although management will be spinning off the magazine division.

Since Time is a low performer in the Time Warner Inc (NYSE:TWX) portfolio (in an otherwise excellent Q1, Time showed revenue declines as subscriptions continue to lag), this makes good business sense and shows that management is making the right moves. The almost 2% dividend yield isn’t enough for an income investor, but it’s a nice bonus as the stock benefits from the company’s diversification and earnings growth. It’s worth a buy as well.