The US$85-billion acquisition of 
Time Warner (TWX) by AT&T (T) announced at the end of October has put the spotlight on the media industry. Although subject to regulatory approval, the deal signals a seismic shift in the media industry, which is evolving to adapt to emerging technology trends, viewing patterns and growing competition from streaming media titans such as Netflix (NFLX) and Amazon (AMZN).
The shake-up in the industry could create attractive buying opportunities for investors as media companies find creative ways to attract new customers, coax existing subscribers to stay, and regain millennial cord-cutters. With new-age media companies rapidly growing their content-making muscle, traditional entertainment powerhouses are quickly adapting to the new landscape and shifting trends in content consumption.
Lacking neither in will nor wherewithal, legacy media enterprises are already moulding and enhancing their business models as per changing viewing habits of consumers. They own vast and valuable catalogues of content and media networks, and are nimble enough to participate in the industry's digital transformation. They also have robust fundamentals and strategic business mix that act as a bulwark against competitive pressures, according to Morningstar equity research.
| Viacom Inc. B | ||
| Ticker | VIAB | |
| Current yield | 3.83% | |
| Forward P/E | 8.4 | |
| Price | $36.56 | |
| Fair value | $53 | |
| Data as of Nov. 4, 2016 | ||
A global media entertainment brand, Viacom Inc. (VIAB) creates TV content and motion pictures for viewers in 180 countries. The company's assets include leading cable networks including Nickelodeon, MTV, Comedy Central and VH1. It also owns properties such as Paramount Pictures, which produces original motion pictures, and a deep library of films that includes titles like The Godfather and the Transformers series.
In a major push into the digital world, Viacom has tied up with 20 international pay television partners for its mobile streaming service, Viacom Play Plex, and other multi-platform products. In addition, it is reported to be in advance talks with Google to join the latter's web TV service slated to launch early next year.
The crown jewel of Viacom's assets, Nickelodeon, a leading cable channel for children, generates 40% of its overall earnings before interest, taxes, depreciation and amortization (EBITDA), says a Morningstar report. It notes that "despite the increased competition, Nickelodeon will continue to thrive as a major player in the children's TV segment, given its scale and reputation."
Another network, MTV, produces strong cash flow margins. It benefits from relatively low programming costs and enjoys a positive worldwide brand with teens and young adults. Viacom can leverage these popular brands and "force an operator in the U.S. or around the world to carry a new offering," says Morningstar equity analyst Neil Macker, who puts the stock's fair value at US$53.
Macker says: "The cable networks typically generate the vast majority of Viacom's cash flow through affiliate fees and advertising revenue."
| Walt Disney Co. | ||
| Ticker | DIS | |
| Current yield | 1.54% | |
| Forward P/E | 13.5 | |
| Price | $92.45 | |
| Fair value | $134 | |
| Data as of Nov. 4, 2016 | ||
A leading media giant, Walt Disney (DIS) produces motion pictures under popular labels including Pixar, Marvel and Lucasfilm. It also owns and operates media networks (ESPN, ABC and Disney Channel), television production studios, theme parks and resorts, among others assets.
The media conglomerate appears to be making a big digital push, as evidenced by media speculation that it wants to acquire streaming service provider Netflix. The rumours come close on the heels of media reports about Disney's interest in buying Twitter (TWTR), a move the company decided against in the end. Wall Street is abuzz with talk that Disney is looking to make an acquisition that will boost its presence in the fast-growing online video streaming market.
Disney Movies Everywhere, a digital movie service platform, recently added Fios by Verizon, a mobile application for live streaming TV channels, which will let subscribers access, store and watch Disney's library of films on TV and digital devices.
And while ESPN remains the leading revenue generator, the "firm's parks and resorts segment has rebounded strongly from the recession, and the [June 16] opening of [the $5.5 billion] Shanghai Disney Resort should provide additional momentum," says a Morningstar report.
Disney's franchises will continue to grow as more popular movies get released by the animated studio and Pixar that churned out hits such as Toy Story, Cars and Frozen, says Macker, who puts the stock's fair value at US$134, about 40% above its current price, as of Oct. 24. Morningstar projects 3.9% annual sales growth for the media networks, 7% for parks and resorts, and 4.4% for the film segment, boosted by the Star Wars movies.
| Twenty-First Century Fox Inc. Class B | ||
| Ticker | FOX | |
| Current yield | 1.24% | |
| Forward P/E | 12.6 | |
| Price | $26.69 | |
| Fair value | $35 | |
| Data as of Nov. 4, 2016 | ||
Twenty-First Century Fox (FOX) is a diversified media company that produces and distributes movies and television programming. Its array of impressive assets includes a film studio, broadcast television including the Fox network in the U.S., and cable networks consisting of more than 300 channels globally.
Fox's part ownership of Hulu underscores the firm's strategy to spur growth by following consumers as they switch to streaming content over the internet. At the same time, Fox is also keeping a close focus on premium content, a major contributor to advertising revenue. The company's film studio business can be another driver of long-term growth, as underscored by the success of superhero film Deadpool, which grossed more than $US760 million, and that of film franchises such as Mission Impossible, Avatar and Titanic.
On the small-screen side, the firm owns the 20th Century Fox studio which has produced a slew of global blockbuster TV shows like Modern Family and Homeland.
"The combination of original programming and exclusive sports rights will allow Fox to sharply increase its revenue from retransmission fees and reverse compensation in the near future," says Macker, who assigned Fox a wide-moat rating and a fair value of US$35.
The firm's total annual revenue is projected by Morningstar to grow at 5% from 2016 through 2021, supported by cable networks (7% annual growth), filmed entertainment studio (1%) and television (3%).
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