Watch your wealth grow on Disney, CBS

Disney stock pops on quarterly earnings report.

By InvestorPlace Nov 11, 2011 11:34AM

By Peter Cohan, InvestorPlace


In an economy that's hardly booming, people quickly defer to TV as a cheap entertainment option. But with a glut of options, any entertainment company worth its airwaves has to produce compelling content to snag a big share of those viewers.


Disney Co. (DIS) is one entertainment company that must be hitting that mark, given its blowout earnings report Thursday.


Disney's offerings traverse human interest, from its titan network ABC; to sports offerings through the ESPN family of channels; to kids and teens through Disney Channel, ABC Family and Disney XD; to more acutely focused programming like Lifetime, A&E, SOAPnet and The History Channel. Disney likely has something you are watching -- and are willing to spend your hard-to-come-by money on, given how stagnant Americans' real income growth has been seemingly forever now.


So when Disney reported its fourth-quarter earnings Thursday and blew through estimates, it should be no surprise that it did so on the strength of its cable TV business, as well as its well-known U.S. parks and resorts, which include the flagship Walt Disney World Resort and its Magic Kingdom, Epcot, Hollywood Studios and Animal Kingdom parks.


According to Bloomberg, Disney's profit rose 30% in the quarter. Its sales climbed 7% to meet analysts' estimates of $10.4 billion, while its adjusted earnings per share of 59 cents beat analysts' estimates by 4 cents. Disney benefited most from three factors: increased fees from pay-TV operators, a 13% jump in ESPN ratings, and Disney resorts' higher ticket prices and new cruise ship.


But if you're considering jumping into the entertainment industry, it's worth looking at some of the competition. For instance, rival CBS (CBS).


CBS' third-quarter report Nov. 3, while not as impressive as Disney's, was decent. CBS' net income spiked 38% to $338 million. Its earnings of 50 cents per share beat by expectations by four cents, but its 2% increase in revenue to $3.37 billion fell $60 million short of Wall Street forecasts. While its advertising revenue held steady at almost $2 billion, CBS received higher licensing and affiliate fees in the quarter.


Both companies get revenue from TV advertising and movies, among other sources. A look at global TV advertising revenues suggests it's a big market that's growing solidly. According to ZenithOptimedia, advertising revenue on TV was expected to grow at 2.4% compound annual rate to $191 billion by the end of 2011 and 6% more in 2012 to $202 billion. That would make the market for TV advertising more than twice as large as the second-biggest one -- newspaper ads.


The market for movies is much smaller but growing far faster. PricewaterhouseCoopers expects 2011 North America film revenue to hit $40.8 billion in 2011 and to rise at a 5.4% annual rate to $50.3 billion by 2015. And globally, the film industry is growing faster -- 6.2% annually -- from $88.8 billion in 2011 to $113.1 billion in 2015.


Both industries are growing because of bulging populations in emerging markets such as China, India and Brazil that are watching more TV and increasingly buying movie tickets.


From a financial standpoint, here's what the investment choice between DIS and CBS boils down to:

  • Disney: Slow growth, strong margins; fairly priced stock. Disney's sales have increased 7.4% in the past 12 months to $41 billion, while net income rose 21% to $4.8 billion -- yielding a 12.9% net profit margin. Its price/earnings-to-growth ratio of 1.03 (where a PEG of 1.0 is considered fairly priced) is reasonably valued on a P/E of 14.68 and expected earnings growth of 14.3% to $3.30 in fiscal 2013.
  • CBS: Decent growth, small margins; cheap stock. Revenues for CBS have grown 8% in the past 12 months to $14 billion, while net income jumped 220% to $1.22 billion -- yielding an 8.77% net profit margin. Its PEG of 0.75 is pretty cheap on a P/E of 14.24 and expected earnings growth of 18.89% to $2.24 in 2012.

Both of these entertainment companies are performing well, and the industry itself is growing. Disney's business is going strong, and DIS shares popped about 6% at the bell Friday. But for value investors, CBS looks like the better buy -- especially if it keeps beating EPS growth expectations.


As of this writing, Peter Cohan did not own a position in any of the aforementioned stocks.


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