Big media companies were supposed to die outright along with the old tube TV set.
At least that was the thinking a few years ago as up-and-comers Netflix NETFLIX INC. NFLX 0.11% and Hulu let you bypass commercials, and Facebook FACEBOOK INC. FB -1.63% and YouTube made it possible to create and share your own material.
Given that, the recent performance of old- vs. new-media stocks might surprise you.
This year the legacy players have shot up 34%, more than twice the gain of the S&P 500. Yet Facebook has fallen 45% since it went public in May. Why are the old guys ahead?
In short, Americans still like to watch television, especially live sporting events and buzzed-about series. Average time in front of the TV is up since 2003, from 2.6 hours a day to 2.8, according to the Bureau of Labor Statistics.
“TV-bypass is not a mainstream issue,” says Bill Nygren, a portfolio manager at Oakmark Funds, who invests in several media stocks.
What’s more, even as more consumers watch shows online, traditional media are finding ways to earn money off that shift by creating live streaming tools and cutting deals with Netflix and Apple APPLE INC. AAPL -1.67% . Social media firms, on the other hand, are still struggling to figure out a profitable business model.
Big-media stocks have gotten pricey, with the sector trading at 14.6 times forecast earnings for the next 12 months, compared with 13.5 for the S&P 500.
The good news is that for the strongest players, earnings are expected to grow faster than the S&P’s in the coming years. So stick to these areas for growth worth the price.
Hook onto the cables
Cable-TV subscriptions are dropping off. But a high-speed connection has become a crucial service that consumers are willing to pay up for, says Ann Miletti, a senior portfolio manager at Wells Fargo Advantage Funds.
Broadband subs are as much as 110% more profitable than TV-only customers. That should be a boon to the two largest cable companies, Comcast COMCAST CORP. CMCSA -0.22% and Time Warner Cable TWC 0% . “Cable has proven to be flexible,” says Miletti.
Also, with the high-speed cable infrastructure largely in place, broadband now generates a lot of cash. This year Comcast raised its dividend 44% and announced a plan to repurchase $6.5 billion in stock. Time Warner Cable raised its payout 17% and announced a $4 billion buyback.
At these two cable giants, those payouts have room to grow. Both firms spend less than 40% of their cash on dividends, far less than the 69% that competitor Cablevision CVC 0% spends.
Own in-demand networks
To cash in on the majority of Americans who still watch TV, favor broadcasters with must-have content.
As the owner of the most popular cable channel, ESPN, Disney WALT DISNEY COMPANY DIS -0.15% has pricing clout with the satellite and cable companies that air the sports network. Through 2017, price hikes for ESPN and other Disney channels could boost that fee revenue by 7.6% a year, reports Credit Suisse. Another edge: Two-thirds of Disney’s TV revenue comes from fees, not often-unpredictable ad sales.
Traditional broadcast networks are thought of as the industry laggards: too dependent on ads, audiences shrinking.
CBS CBS CORP. CBS 1.68% , a true pure play, is off 13% since the start of a disappointing fall TV season. But therein lies an opportunity. CBS leads its peers in potential syndication deals and has nine of the top 20 shows.
“The value of broadcast is enormous,” says David Bank, equity research analyst at RBC Capital Markets. CBS is cashing in on that value as broadcasters are collecting more in cable and satellite fees. In 2011, CBS earned 33 cents a subscriber per month. Analysts expect that figure to top $1 in five years.
Spread your bets
If you don’t want to make a bet on a single stock, diversify with a fund that invests in the sector. Fidelity Select Multimedia FIDELITY SELECT MULTIMEDIA FBMPX -0.26% is a good option. To get a boost from global growth, try T. Rowe Price Media & Telecommunications T. ROWE PRICE MEDIA & TELECOMM PRMTX -0.28% , which has 19% of its portfolio overseas.