YCG Investments
“If you buy above average businesses at below average prices, on average, we believe you should come out ahead.” — Brian Yacktman

There's No News Like News Corp.

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It’s morning. You wake up, get ready, and go to get some breakfast. Then you read your morning newspaper. Wait, maybe it’s your morning news on an iPad, laptop, or even an iPhone. Later in the evening, you may choose to watch a movie. Will it be a DVD you own or from Red Box? Or how about some TV streaming digitally through Netflix or Hulu?

You get the point. The entertainment industry has definitely been seeing a lot of technological disruption in the past few years. In fact, the most predictable aspect of the media industry is that things are going to change. However, this doesn’t mean that picking media stocks is like betting on the next horse to win the Triple Crown.

The media industry can be broken down into essentially three parts: the content business, the distribution business (or conduit that distributes media from the content businesses to the consumer), and the business of producing the endpoint devices (TVs, iPhones, iPads, etc.).

If there is one thing that you can always count on, it’s human nature. We as people have always shown a revealed preference for variety. That’s why we always want to watch the newest shows on TV. Sure, the occasional rerun of The Dick Van Dyke Show or even CSI may be appealing at times, but ultimately we will always want new content. Since good content will always have some pricing power, content businesses are always going to continue to make money.

However, as technology advances, the way content is distributed and viewed are constantly changing. For Comcast, there are threats to their triple play. Even if you can accurately predict how media will be distributed in the future, there is still much uncertainty about Comcast’s pricing power and ability to negotiate fees. As for endpoint devices, companies like Apple have shown that there is no end to the plethora of hot, new devices that can be used to view media. Nonetheless, the quick rise of Apple, just like Microsoft and IBM of the past, also notes that today’s winning horse may be tomorrow’s glue.

Comcast has definitely recognized the threat to its distribution profit generator, the triple play. That’s why they have recently acquired NBC Universal in an attempt to get direct access to a producer of content that will stabilize their revenues. But the core cable distribution pipeline business will still generate about ¾ of the operating profit. So, as Comcast has now reached a more fair value, we’ve begun trimming our position and sticking it into a more content oriented business – News Corp.

In contrast to Comcast, more than ¾ of News Corp. profits are made in the cable network programming in programs such as Fox business, STAR, FX, etc. They also own the 20th Century Fox film studio, some Internet properties such as MySpace, and a print division (global Wall Street Journal & Times of London, regional New York Post, HarperCollins book imprint). At its recent valuation, content-heavy News Corp. has looked like one of the better risk-adjusted values in the marketplace.

Disclaimer: The specific securities identified and discussed should not be considered a recommendation to purchase or sell any particular security. Rather, this commentary is presented solely for the purpose of illustrating YCG’s investment approach. These commentaries contain our views and opinions at the time such commentaries were written and are subject to change thereafter. The securities discussed do not represent an account’s entire portfolio and in the aggregate may represent only a small percentage of an account’s portfolio holdings. These commentaries may include “forward looking statements” which may or may not be accurate in the long-term. It should not be assumed that any of the securities transactions or holdings discussed were or will prove to be profitable. Past performance is no guarantee of future results.

Posted by: Mike Yacktman | January 13, 2011 | Permalink

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