Media stocks have been on a fantastic run as of late, and the trend looks to continue after CBS (click ticker for report: ) posted great results and Disney’s (click ticker for report: ) Iron Man 3 put up a blockbuster debut at the box office internationally and domestically. Let’s take a look at recent events.
CBS
CBS posted strong first quarter results, driven by a 6% year-over-year increase in revenue to $4 billion, which resulted in a 24% jump in operating earnings per share to $0.73. Both figures easily exceeded consensus expectations. Strong headline results consummated in $553 million in free cash flow.
Results were solid for CBS across all of its segments, though entertainment led the charge with a 10% year-over-year increase. The firm attributed the increases to strong advertising revenues from the Super Bowl—though the company had one week less of NFL games and saw the NCAA Championship game pushed into the second quarter. In addition to a strong boost from sports broadcasting, we think the network’s content remains a key component to the CBS strategy. The company continues to create exceedingly popular TV shows, which lead to not only strong short-term advertising revenues but also strong demand for syndication relationships with other networks and from the likes of Netflix (click ticker for report: ) and Amazon (click ticker for report: ). This could be a nice profit center in coming years.
CBS’ publishing sector remains fairly lackluster, as revenue at Simon & Schuster declined 3% year-over-year to $173 million. OIBDA (operating income before depreciation and amortization) increased $2 million to $12 million, but we do not anticipate this segment to become a large profit center anytime soon.
The company’s American outdoors segment, which includes billboards, street furniture, and the like will be spun-off into a REIT, while the international outdoors segment will be shopped. Both moves could unlock some value for shareholders and could free up some new cash for additional repurchases or acquisitions.
In addition to strong financial performance across all segments, the firm continues to be aggressive in share repurchases, retiring 24.1 million shares during the first quarter. For perspective, the share count is down 4% from a year ago, and we believe management will remain engaged in repurchases as long as the team believes the share price looks attractive.
Disney
Disney’s recent catalysts haven’t been tied to earnings performance, but rather can be derived from recent film results and news. Iron Man 3 generated $680 million in global sales over its first 12 days, with the US accounting for $175 million during its opening weekend. Without question, the film seems on track to generate well over $1 billion in ticket sales, and the firm became one of Disney’s highest gross-opening weekends ever.
Clearly this will help Disney’s current quarter and fiscal year, but it also foreshadows how strong demand could be for the Thor sequel as well as coming installations of Captain American and The Avengers. The firm’s purchase of Marvel looks like more of a bargain after every film release.
We think the same will be said about the recent purchase of Lucas Films. Disney recently confirmed that we will likely see a Star Wars branded movie annually, and if the company is able to please diehard fans like it has with the Marvel films, the new Star Wars movies could generate large amounts of revenue (almost) indefinitely.
Overall, shares of both Disney and CBS look fairly valued; unfortunately, the market appears privy to the fantastic long-term cash generating possibilities. Still, due to their strong long-term fundamental outlooks, we will be carefully monitoring their respective share prices. If either dips in the event of a broader market swoon, we could look to establish a position in the portfolio of our Best Ideas Newsletter.