Needham & Company on Entertainment and Internet: Media Industry - What is ROIC?...Why It Matters
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Up: 8 | Down: 5 | New: 26
Rating Summary:
20 Buy, 12 Hold, 3 Sell
Rating Trend: = Flat
Today's Overall Ratings:
Up: 8 | Down: 5 | New: 26
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Needham & Company on Entertainment and Internet: Media Industry - June 2012 ROIC Analysis
Analyst, Laura Martin, said, "There is typically an 80-90% statistical correlation between forward-year ROICs and valuations (share prices) in the media space. Most of Wall St closely follows the income statement, ie, the numerator. In this quarterly report, we analyze the denominator - trends in assets intensity, capital allocation, working capital changes, TV and film investments, and free cash flow for 5 companies we cover: CBS (NYSE: CBS) (Buy); Disney (NYSE: DIS) (Hold); News Corp (Nasdaq: NWSA) (Buy); Time Warner (NYSE: TWX) (Hold); and Viacom (Nasdaq: VIAB) (BUY). We expect to launch ROIC analysis on Discovery (Nasdaq: DISCA)(Hold) and Scripps Networks Interactive (NYSE: SNI)(Buy) next quarter."
Return of Capital to Capital Markets: All 5 companies bought back stock and paid dividends. Most paid with free cash flow. DIS and TWX paid down debt in the quarter, CBS and VIAB added debt.
Investing Activities: None of the media companies we cover have significant capital spending, other than Disney (owing to its theme parks business). Disney spent $740mm in the June quarter, which was approximately one-half of March 2012 levels
EBITDA vs Cash from Operations: The highest FCF conversion rate came from DIS at 77%, followed closely by NWSA at 72% and CBS at 68%. All of these companies generated strong FCF in the June quarter.
TV and Film Investments: All 5 of these companies have significant amounts of capital invested in the film and/or TV businesses. Films typically do not return their cost of capital. We note that CBS has almost no investment in film while TWX has the largest investment by a factor of two. Despite Disney’s size and ownership of ESPN, it has a much lower investment in film and TV costs than NWSA and TWX, which is interesting.
What is ROIC? Return on invested capital or ROIC is a measure of how efficiently a company uses capital to generate profits. There are three primary sources of capital: net income after taxes from running the businesses; equity capital (public sale of shares); and debt capital (public bond issuances and/or bank loans). Improving asset efficiency typically drives accelerating free cash flow that can be used for debt repayment, share repurchases, dividend increases and/or acquisitions (ie, acquiring new cash flow streams).
Analyst, Laura Martin, said, "There is typically an 80-90% statistical correlation between forward-year ROICs and valuations (share prices) in the media space. Most of Wall St closely follows the income statement, ie, the numerator. In this quarterly report, we analyze the denominator - trends in assets intensity, capital allocation, working capital changes, TV and film investments, and free cash flow for 5 companies we cover: CBS (NYSE: CBS) (Buy); Disney (NYSE: DIS) (Hold); News Corp (Nasdaq: NWSA) (Buy); Time Warner (NYSE: TWX) (Hold); and Viacom (Nasdaq: VIAB) (BUY). We expect to launch ROIC analysis on Discovery (Nasdaq: DISCA)(Hold) and Scripps Networks Interactive (NYSE: SNI)(Buy) next quarter."
Return of Capital to Capital Markets: All 5 companies bought back stock and paid dividends. Most paid with free cash flow. DIS and TWX paid down debt in the quarter, CBS and VIAB added debt.
Investing Activities: None of the media companies we cover have significant capital spending, other than Disney (owing to its theme parks business). Disney spent $740mm in the June quarter, which was approximately one-half of March 2012 levels
EBITDA vs Cash from Operations: The highest FCF conversion rate came from DIS at 77%, followed closely by NWSA at 72% and CBS at 68%. All of these companies generated strong FCF in the June quarter.
TV and Film Investments: All 5 of these companies have significant amounts of capital invested in the film and/or TV businesses. Films typically do not return their cost of capital. We note that CBS has almost no investment in film while TWX has the largest investment by a factor of two. Despite Disney’s size and ownership of ESPN, it has a much lower investment in film and TV costs than NWSA and TWX, which is interesting.
What is ROIC? Return on invested capital or ROIC is a measure of how efficiently a company uses capital to generate profits. There are three primary sources of capital: net income after taxes from running the businesses; equity capital (public sale of shares); and debt capital (public bond issuances and/or bank loans). Improving asset efficiency typically drives accelerating free cash flow that can be used for debt repayment, share repurchases, dividend increases and/or acquisitions (ie, acquiring new cash flow streams).
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