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Long-time readers of my newsletter are well aware of my fondness for media companies. That attraction has been rewarding over time but has not been without its share of drama, notes Charles Carlson, editor of DRIP Investor.
Currently, there is plenty of drama surrounding the group. The biggest issue impacting media companies is the disruption occurring on the distribution side. The fear is that as more consumers “cut the cord,” media companies will find their advertising rates under pressure as ratings and viewers decline.
While the bearish case for media has its merits, I still believe that content will win the day. If you are a media company that produces content consumers want, the fact that the distribution channels for this content are changing and expanding should ultimately be a plus for your business, not a negative.
Yes, there will be the typical transitional pains as business models change. But at the end of the day, if you have content people want—and you own that content—you should be able to generate healthy profits from that content.
Another factor that will separate the winners and losers in media will be those firms who have created multiple revenue streams. That’s where a company like Comcast (CMCSA) shines. While the company is known for its giant cable business, Comcast is also the biggest provider of Internet services in the U.S.
Thus, the firm has been able to fend off cord cutting by packaging cable, the internet, and telephone services in a compelling value package. And Comcast has other streams of revenue.
The company’s Universal theme park business, as well as its filmed entertainment and NBC and Telemundo broadcast television operations, help diversify its revenue base.1
The stock has held up well despite the beating in the group. I like Comcast at current prices and would buy aggressively on pullbacks to the low $30s.
Similar in its diversified revenue streams to Comcast is Walt Disney (DIS). The firm, too, has theme parks, filmed entertainment, network broadcasting (ABC), as well as cable properties (ESPN).
Disney has become the poster child for cord cutting due to the impact cord cutting has had on its important ESPN franchise. However, Disney is a master at monetizing its brand assets and should be successful in creating profitable revenue streams from ESPN in the digital age.
At some point, it is likely ESPN will offer its own “skinny bundle” of programming directly to viewers. In the meantime, its other businesses should pick up the slack. For long-term investors who want exposure to media and entertainment, Disney remains a blue-chip pick.
Both its network programming as well as its Showtime premium channel seem to be sought-after content for many of the “skinny bundles” that are emerging.
CBS owns nearly all of its programs, which means the firm has the capability to leverage that programming across a variety of distribution platforms. The stock is down 12% from its 52-week high. Yielding 1.2%, CBS is a buy at current prices.
Scripps Networks Interactive has a variety of cable brands, including the popular HGTV, Food Network, Travel Channel, DIY Network, and Cooking Channel. Scripps Networks has been expanding overseas and is now a major player in Poland.
The stock has fallen 18% from its 52-week high. And while Scripps Networks doesn’t have the multiple revenue streams that Disney or Comcast possess, it has the sort of targeted content that advertisers and distributors want. Buy the stock.
Charles Carlson is the CEO of Horizon Publishing, an investment newsletter publisher, and is also the CEO of Horizon Investment Services, a money management company.
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