The media world is an exciting place right now, but it's also filled with danger, with some of the biggest tech names in Silicon Valley entering the streaming race and causing considerable angst among traditional media investors.
Yet has the fear gone too far? Investors may not realize that even if they watch a show on Netflix (NFLX -1.13%) or another streaming service, much of the content is still licensed from traditional media studios. As they say, "content is king," and many old-school media companies produce and own tons of valuable intellectual property -- no matter which platform that content ultimately shows up on.
As such, several "old media" companies have been thrown into the bargain bin prematurely, with price-to-earnings ratios in the single digits despite solid earnings results still exhibiting good growth. Here are two of the best-run "old" media companies currently trading at bargain valuations.
CBS (PARA -4.96%) is currently suffering from two big overhangs: First, as the highest-rated broadcaster, some fear CBS might lose out as more people cut the cord on traditional cable; second, the company's recent acquisition of Viacom (NASDAQ: VIA) (VIAB) brought even more cable-centric problems.
Addressing the first concern, if CBS is vulnerable to cord-cutting and streaming, it hasn't shown up in the company's results. Last quarter CBS grew revenue 10% with growth across all of its segments, with advertising up 7%, distribution and licensing up 12%, and affiliate and subscription revenue up 13%.
That doesn't exactly seem like a company that's going away anytime soon. However, even if the cord-cutting trend accelerates, CBS has prepared itself with two direct-to-consumer streaming services: CBS All-Access and premium cable channel Showtime, which last quarter grew their subscription revenue 60% and 30%, respectively.
CBS also has a very smart strategy of producing as much content as it can, even if it licenses the content to rival streaming platforms. CBS realizes all of the new and existing streaming services need as much hit content as possible, and by opening its TV studio to other streamers CBS can say yes to more shows, while also maximizing the value of each show, especially if a show happens to be a better fit for another service. As the producer, CBS also gets to own the rights to that content long-term. Some recent examples include the show Dead to Me, which is currently on Netflix, and also the new version of Beverly Hills 90210, which will be on Fox this Fall.
Viacom also underrated
On the Viacom issue, analysts are divided on the merger. While some think the companies will benefit from scale and synergies, pessimists believe that Viacom had low-quality cable assets doomed to fail in the new age of streaming, as its niche cable channels -- such as Comedy Central, MTV, Nickelodeon, Logo, and others -- aren't enough to scale against the streamers.
However, Bob Bakish, who will soon become CEO of the combined companies, has actually done a very good job turning things around at Viacom. Last quarter the "struggling" conglomerate returned to advertising growth for the first time in 20 quarters. Part of that success is from better programming and content, but it's also due to Viacom's new advanced marketing solutions (AMS) product suite, which is almost like an internally built ad tech platform geared for media and streaming. The solution, which incorporates advanced targeting beyond traditional TV demographic metrics (sort of a mix between a programmatic ad solution and a traditional media solution), made up 20% of Viacom's ad revenue last quarter, and grew at a whopping 84%.
Additionally, CBS was actually able to acquire Viacom in an all-stock deal that equated to a share price below where Viacom was trading in the public markets. So it's not as if CBS paid a huge amount for the privilege of owning Viacom's assets. In fact, you could say it acquired Viacom at a discount to the company's already-low valuation.
Together, I expect CBS and Viacom's Paramount Studios to continue to churn out content for their own platforms, as well as those of other streaming services, along with more ad tech innovation. They might not put up the growth numbers of newer and sexier companies, but with CBS and Viacom currently trading at 5.1 and 6.6 PE ratios, respectively, they don't have to.
Another media stock trading at a discount -- its forward PE ratio sits at a whopping 6.9 -- is Discovery (DISC.A) (DISC.B) (DISCK). Like CBS and Viacom, Discovery's strength is its content. As the undisputed leader in non-fiction reality content, Discovery is somewhat unique in a marketplace where big companies are chasing very expensive A-listers and premium fiction shows.
Discovery's 2018 acquisition of Scripps Networks Interactive brought together the two leading unscripted media companies, with many beloved channels such as HGTV, Food TV, The Learning Channel, Investigation Discovery, and OWN, among others. Combined, Discovery's portfolio is actually the number one media company for female viewership, with a combined 16% market share.
Discovery also has a big international sports franchise in Eurosport, which shows the Olympics across 200 countries, as well as other sports in Europe. In addition, Discovery is leading in the niche passion sports of cycling and golf, with its new GOLFTV app inkng an exclusive deal with Tiger Woods earlier this year. Eurosport and GOLFTV also have their own direct-to-consumer offerings.
There are some interesting benefits of relying on non-fiction content. One, it's much less expensive to make and thus sell to other cable platforms; two, the "reality" component of cooking, home improvement, or golf speaks very closely to people's existing hobbies and passions, thus making it highly attractive for targeted advertisers.
That's manifesting in solid numbers for Discovery, which exhibited 6% domestic advertising growth, 5% domestic affiliate fee growth, 5% international advertising growth (in constant currency) and 3% international affiliate fee growth (in constant currency) last quarter. This doesn't exactly seem like a company deserving of a PE ratio under seven.
The bottom line is that the market currently believes CBS-Viacom and Discovery will be severely challenged in a world of over-the-top streaming and cord-cutting. However, both companies own significant intellectual property and are experienced content creators, and should thus find a profitable home for that content, whether it be on traditional cable, their own direct-to-consumer platforms, or even others' platforms. That makes both stocks huge bargains at today's prices.