With the arrival of autumn and cooler temperatures, people are spending more time inside. To occupy their time indoors, the most popular activity is by far watching television. According to Nielsen’s latest Total Audience Report, Americans over the age of 18 spend an average of four and a half hours a day glued to their TV screens, and with good reason. Fall is a prime time for TV viewing as collegiate and professional football games dominate screens on weekends, and networks release the latest episode of popular shows during the week. In addition, many major entertainment companies release new movies to draw audiences to theaters around the world.
As a result, investors may be interested in quality entertainment companies that are trading near the Peter Lynch value.
A renowned investor, Lynch developed this strategy in order to simplify his stock-picking process. With the belief good, stable companies eventually trade at 15 times their annual earnings, he set the standard at a price-earnings ratio of 15. Stocks trading below this level are often considered good investments since their share prices are likely to appreciate over time, creating value for shareholders. In this instance, the parameters were increased to 20 to generate more potential picks that are profitable, yet not too overvalued according to Lynch’s standards. The GuruFocus All-in-One Screener also looked for companies with a business predictability rank of at least two out of five stars and a 10-year revenue per share growth rate of at least 6%.
As of Oct. 23, the screener found entertainment companies that met these criteria were The Walt Disney Co. DIS, Discovery Inc. DISCA and Nexstar Media Group Inc. NXST.
Walt Disney
One of the most recognized entertainment giants in the world, Disney produces several box office hits every year from its namesake production company as well as its Marvel, Pixar and Lucasfilm labels, among others. It also owns theme parks and resorts, cruise lines, sports network ESPN and television networks like ABC. In addition to releasing movies “Frozen 2” and “Star Wars: The Rise of Skywalker” over the next couple months, the company is launching its Disney+ streaming service in November.
The Burbank, California-based company has a $238.5 billion market cap; its shares were trading around $132.40 on Wednesday with a price-earnings ratio of 16.59, a price-book ratio of 2.63 and a price-sales ratio of 3.24.
The Peter Lynch chart shows the stock is trading below its fair value, which suggests it is only slightly overvalued.
Guru Focus rated Disney’s financial strength 4 out of 10. Although the company has issued approximately $16.2 billion in new long-term debt over the past three years, it is still at a manageable level as a result of adequate interest coverage. The Altman Z-Score of 2.04, however, indicates it may be under some financial pressure as GuruFocus warns that the company’s earnings could be in decline since its forward price-earnings ratio is higher than its trailing price-earnings ratio.
The company’s profitability fared much better, scoring a 9 out of 10 rating on the back of operating margin expansion, strong returns that outperform a majority of competitors and consistent earnings and revenue growth. Disney has a low Piotroski F-Score of 3, however, which may suggest it has poor business operations. It also has a four-star business predictability rank. According to GuruFocus, companies with this rank typically see their stocks gain an average of 9.8% per year.
Of the many gurus invested in Disney, Yacktman Asset Management (Trades, Portfolio) has the largest stake with 0.24% of outstanding shares. Other top guru shareholders include Pioneer Investments (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Spiros Segalas (Trades, Portfolio), Diamond Hill Capital (Trades, Portfolio), Larry Robbins (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Mairs and Power (Trades, Portfolio), David Carlson (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Dodge & Cox, the T Rowe Price Equity Income Fund (Trades, Portfolio) and Richard Snow (Trades, Portfolio).
Discovery
Formerly known as Discovery Communications, the company is one of the largest mass media providers in the world. In addition to its three main networks, Discovery, TLC and Animal Planet, it also operates several other popular television channels, including HGTV, Food Network and DIY Network.
The company, which is headquartered in Silver Spring, Maryland, has a market cap of $14.34 billion; its shares were trading around $28.11 on Wednesday with a price-earnings ratio of 11.68, a price-book ratio of 2.09 and a price-sales ratio of 1.82.
According to the Peter Lynch chart, the stock is undervalued.
Weighed down by approximately $6 billion in new long-term debt and poor interest coverage, Discovery’s financial strength was rated 4 out of 10 by GuruFocus. Additionally, the low Altman Z-Score of 1.28 warns the company could be at risk of going bankrupt.
The company’s profitability fared much better with a score of 8 out of 10. Although Discovery’s margins are contracting, it is supported by strong returns that outperform over half of its industry peers, steady earnings and revenue growth, a moderate Piotroski F-Score of 6, which suggests operations are stable, and a 2.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 7.3% per year.
With 0.49% of outstanding shares, the Smead Value Fund (Trades, Portfolio) is the company’s largest guru shareholder. Gabelli, Pioneer, Joel Greenblatt (Trades, Portfolio), Ray Dalio (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Jeff Auxier (Trades, Portfolio), Lee Ainslie (Trades, Portfolio) and John Hussman (Trades, Portfolio) also own the stock.
Nexstar Media Group
The broadcasting company, which is the largest television station owner in the U.S. with 197 stations across 115 markets, is affiliated with the four major networks, streaming their content to its viewers.
The Irving, Texas-based company has a $4.74 billion market cap; its shares were trading around $103.01 on Wednesday with a price-earnings ratio of 12.96, a price-book ratio of 2.51 and a price-sales ratio of 1.78.
Based on the Peter Lynch chart, the stock appears to be undervalued.
On the back of a large debt load and poor interest coverage, GuruFocus rated Nexstar’s financial strength 3 out of 10. In addition, the Altman Z-Score of 1.45 warns the company could be in danger of bankruptcy.
The company’s profitability scored an 8 out of 10 rating, driven by an expanding operating margin, strong returns that outperform a majority of competitors and a moderate Piotroski F-Score of 6. Despite recording a slowdown in revenue per share growth over the past 12 months, Nexstar has a four-star business predictability rank.
Seth Klarman (Trades, Portfolio) is the company’s largest guru shareholder with a 3.03% stake. Other top guru investors are Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Pioneer, Greenblatt, Gabelli, Chuck Royce (Trades, Portfolio), Hussman and Paul Tudor Jones (Trades, Portfolio).
Disclosure: No positions.
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