Media Savvy

Tuna Amobi, senior analyst at Standard & Poor’s Equity Research, doesn’t like to mince words about the direction of the U.S. economy in the coming year. “We’re telling investors to be very, very cautious because the data seems like it’s going to get even choppier as we look ahead,” he says. Economists from Standard & Poor’s believe the economy will grow at a sluggish 2.5% in 2011. They also predict a 25% chance of a double-dip recession.

In spite of that gloomy outlook, Amobi is surprisingly upbeat about some of the companies he reviews as director of S&P’s media and entertainment equity research group. “You’re going to see a media sector that rallies ahead of that recovery and some stocks that outperform,” he notes. black enterprise talked to Amobi about the entertainment companies he’s recommending to his clients now.

Give us an idea of some media stocks that can outpace the market over the next year or so.
I want to talk about three companies: Discovery Communications Inc. (DISCA) and DreamWorks Animation SKG Inc. (DWA), which I recommend as “strong buys” and Time Warner (TWX), which I rate as a “buy.” The common thread across all three companies is that they are all pure content players, which is important as you look at the proliferation of media distribution outlets and shifts in consumer patterns. The second common thread: These companies are well positioned to capitalize on advancements in digital technologies like 3-D television, 3-D movies, high-definition television and things like new tablet devices and e-readers. Lastly, all these companies have financial flexibility. They’ve come through the recession relatively better than their peers. They have a strong program in returning cash to shareholders either through dividends or share buybacks or a combination of both.

Let’s start with Discovery.
Discovery (DISCA) is a company that we like primarily as a pure content provider with a unique level of business and geographic diversification. By business diversification we mean the diversification of revenue into not just advertising but also what we call affiliate revenues, which are the revenues the company receives from cable providers or satellite TV providers. The importance of affiliate revenues was highlighted during the recession, when you saw a lot of advertising-dependent players get hammered. Well, Discovery came through the recession in a significantly better position, thanks in large part to the affiliate revenues, which account for more than half of the company’s income. Affiliate revenues are usually long-term contracts that a company negotiates with cable and satellite. That’s why the company came through very strongly. They were also the only [publicly traded] media company to grow advertising revenue in 2009. That also speaks to what we think is a very strong content pipeline. Their core channels are Discovery Channel, TLC, and Animal Planet. Beyond that, they have a lot of other channels that are at various stages of development or rebranding. In terms of the geographic diversification, Discovery Communications operates in about 185 countries around the world. This is a truly globalized company that serves a vast international audience with programming that tends to be very culturally neutral. Advertising revenue has been growing north of 30% internationally in the last couple of quarters. That’s well above the average for the peer group.

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