While stock markets are still to recover from last year's tragic performance, there's certainly plenty of action brewing in the world of film and entertainment. This time of year marks the beginning of the movie awards season that kicks off with the Golden Globes, followed by the British Academy of Film and Television Arts (BAFTA), culminating with the highest honours in filmmaking, the Oscars.
Apart from celebrating scripts and screen performances, these awards also shine a bright spotlight on media companies that produce and profit from such content. Some of these companies may present attractive investment opportunities. Not only is there a growing demand for the entertainment, news and sports content they generate, but also their product offerings enjoy a relative disconnect from prevailing economic conditions.
These enterprises are built on strong fundamentals and strategic business mix. They also own vast repertoires of content and media networks, and are innovative enough to withstand changes in traditional viewing habits, whether triggered by disruptive technologies or a mounting aversion among consumers to high cable TV fees, according to Morningstar equity research.
| Walt Disney Co. | ||
| Ticker | DIS | |
| Current yield | 1.38% | |
| Forward P/E | 16.0 | |
| Price | US$99.25 | |
| Fair value | $134 | |
| Data as of Jan. 8, 2016 | ||
The entertainment giant 
Walt Disney Co. (DIS) produces motion pictures (under labels like Pixar, Marvel and Lucasfilm), television shows and music. It also operates media networks (including ESPN, ABC and Disney Channel), television production studios, theme parks and resorts, among others assets.
The crown jewel of Disney's media networks segment is ESPN, which dominates U.S. sports television and enjoys exclusive rights to broadcast National Football League (NFL) and college football -- premier sports events in the United States.
"ESPN profits from the highest affiliate fees per subscriber of any cable channel, and generates revenue from advertisers interested in reaching adult males ages 18 to 49, a key advertising demographic," Morningstar equity analyst Neil Macker said in a report. Macker ascribes Disney's strong competitive advantage to the unique content on ESPN and Disney's vast library of financially rewarding feature films and animated characters.
Macker, who puts the stock's fair value at US$134, said the company's animated franchises, including hits like Toy Story, Cars and Frozen, "will continue to grow as more popular movies get released by the animated studio and Pixar."
His forecast includes 3.9% annual sales growth from the media networks, 7% for parks and resorts during the next five years, and 4.4% for the filmed entertainment segment due to the addition of the Star Wars movies.
| CBS Corp. Class B | ||
| Ticker | CBS | |
| Current yield | 1.29% | |
| Forward P/E | 10.9 | |
| Price | US$46.46 | |
| Fair value | US$59 | |
| Data as of Jan. 8, 2016 | ||
CBS Corporation (CBS) is a U.S. multimedia conglomerate that operates broadcasting, television production, publishing and online content businesses. The company's television assets include the CBS television network, 30 local TV stations, 50% of CW Television Network -- a joint venture between CBS and Time Warner -- and Showtime, a premium cable and satellite television network.
With the 2016 U.S. presidential race in full swing, major broadcasting companies like CBS are well positioned to financially benefit from the big money spent on media advertising -- an integral part of political campaigns.
However, it's the entertainment segment that provides the firm much of its competitive advantage, and 50% of its earnings before interest, taxes, depreciation and amortization (EBITDA). A Morningstar equity report noted that CBS's television production studio, which created such popular shows as CSI and NCIS, is the most attractive asset in the entertainment segment. "These series generate multiple cash flows across different windows such as broadcast first run, cable syndication, online and DVDs," said the report.
Macker said: "The combination of highly rated original programming and exclusive sports rights will allow CBS to sharply increase its revenue." He pegged the stock's fair value at US$59 and projected a 3% annual top-line growth through 2019.
| Viacom Inc. Class B | ||
| Ticker | VIAB | |
| Current yield | 3.73% | |
| Forward P/E | 6.5 | |
| Price | US$40.98 | |
| Fair value | US$63 | |
| Data as of Jan. 8, 2016 | ||
A global media entertainment company, Viacom Inc. (VIAB) owns leading cable network properties such as Nickelodeon, MTV, Comedy Central and VH1. The company's assets include Paramount Pictures, which produces original motion pictures and owns a library of films including The Godfather and Transformers series.
The four-star-rated company generates 40% of its overall EBITDA through Nickelodeon, a leading cable channel for children, which will continue to thrive as a major player due to its scale and reputation, said a Morningstar equity report.
MTV also produces strong cash flow margins as the channel benefits from relatively low programming costs an enjoys a positive worldwide brand with teens and young adults, the report noted.
The company's competitive advantage is driven by high barriers to entry created by high costs of quality content creation. As well, Viacom can leverage its popular brands Nickelodeon or MTV to force an operator in the U.S. or abroad to carry a new offering.
Macker, who put the stock's fair value at US$63, said the cable networks typically generate the vast majority of Viacom's cash flow through affiliate fees and advertising revenue. "By 2019, we expect ad revenue to account for about 45% of cable network revenue, with affiliate fees producing 49%," he said.
| Twenty-First Century Fox Inc. Class B | ||
| Ticker | FOX | |
| Current yield | 1.16% | |
| Forward P/E | 11.4 | |
| Price | US$25.93 | |
| Fair value | $38 | |
| Data as of Jan. 8, 2016 | ||
Twenty-First Century Fox Inc. (FOX) is a diversified media company that produces and distributes movies and television programming. Its wide range of assets include a film studio, broadcast television including the Fox network in the U.S., and cable networks consisting of more than 300 channels around the world.
On the filmed entertainment side, the firm owns the 20th Century Fox studio which has produced a raft of hit television programs (Modern Family and Homeland) and movies (Mission Impossible, Avatar and Titanic), and owns robust film franchises.
According to a Morningstar equity report, Fox News continues to outpace CNN and MSNBC to remain the number one cable news channel. "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," said Macker, who assigned Fox a wide-moat rating, or strong competitive advantage.
Morningstar forecasted an average 4.8% annual revenue growth through 2020. The stock's US$38 fair value estimate by Morningstar factors in 7.4% projected average annual growth for the cable networks, 1.6% for the filmed entertainment studio, and 2.6% for the television segment.
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