Entertainment companies are powerhouses of intellectual property. Sometimes they are able to draw upon decades of characters and make profits even during bad times by rehashing old stories or re-releasing old material. This is one of the strongest moats there is.
When an entertainment company has long-term connections to distributors and popular properties, it can virtually mint money. However, there is always the need to produce new content. Let’s see how a few entertainment companies are operating as the recession’s escapism wanes.
Too much opportunity to pass up
Time Warner Inc (NYSE:TWX) is the largest media conglomerate in the world, and the second-largest entertainment conglomerate in terms of revenue. Time Warner can always turn some profit by using its New Line ownership of the Nightmare on Elm Street franchise to crank out another Freddy Krueger movie — the world can’t get enough of them. Time Warner Inc (NYSE:TWX) also has plenty of classical content via Hanna-Barbera that appeals to the Generation X crowd. Partially because of these options, the company is turning an 11% profit margin and is able to pay a 2% dividend.
I suggest watching Time Warner Inc (NYSE:TWX) primarily because of the potential profitability of the intended spin-off of Time in late 2013. Historically, spin-offs have a tendency to be good chances for companies to focus on their core businesses, as well as unload debt and other unprofitable components of themselves onto their offspring. Nonetheless, these new businesses can often thrive by being more deeply connected to their core markets and can better satisfy their needs.
Time Warner Inc (NYSE:TWX) still hasn’t managed to make HBO relevant to the portable media market — they’re still hooked on cable. This is probably a portion of why the company is trading for a half-decent 18 times earnings and 1.8 times book value. With the spin-off potential and the off chance that HBO will eventually get its act together and break the cable, I’d suggest taking a chance on Time Warner.
Serious Prospects in Non-serious Media
The Walt Disney Company (NYSE:DIS) is the biggest revenue generator of all entertainment conglomerates. Disney owns a mountain of intellectual property, including the Marvel universe of superheroes, Pixar, ABC and obviously all of the Disney characters. The company can put these characters on virtually anything, and has both media networks and consumer products divisions standing by to reap the rewards of doing so. As such, The Walt Disney Company (NYSE:DIS) has a healthy 13.6% profit margin and plenty of cash flowing through it to last through most anything. Moats don’t get much wider and deeper than this company has.
The Walt Disney Company (NYSE:DIS) has a brilliant marketing method, though not a unique one. With most advertisements, the public gets the commercial message for free. When it comes to the characters in movies, however, people pay to see what is essential an ad for movie merchandise.