Mr. Bowman is a portfolio manager at Hamilton-based Wickham Investment Counsel Inc., an adviser to high-net-worth clients. mike@mikebowmangroup.com
What are we looking for?
According to Plunkett Research, $34.8-billion (U.S.) was spent at entertainment venues around the world in 2013, and the global audience is growing quickly. My colleague Rob Belanger and I decided to look at the rapidly changing and fiercely competitive entertainment sector.
The screen
We grouped these North American companies by market capitalization and sorted them from the largest to the smallest.
We screened using two value metrics. The EV/EBITDA (enterprise value divided by earnings before interest, taxes, depreciation and amortization) is one of the most commonly used valuation metrics, and we are looking for a low number. The free cash flow (FCF) yield is the free cash flow per share divided by the share price. The lower the ratio, the less attractive is the investment.
We also screened on two efficiency ratios. Return on invested capital (ROIC) shows how well a company is using its money to generate returns. We are looking for a high number, and only companies with positive ROIC are included. Operating profit margin (OPM) is a measurement of what portion of a company's revenue is left over after paying for variable costs such as wages and inventory. A high number is preferable, and the OPM had to be positive.
We are showing sales growth for the past 12 months, which also had to be positive.
What did we find?
Lions Gate Entertainment Corp. will generate revenues of $2-billion at the international box office for the second year in a row, and its TV business includes 28 different shows on 20 different networks. The company's EV/EBITDA is the lowest on our screen.
Outerwall Inc. is the name behind the Redbox movie and video game rental kiosks available across North America. The company sports the best FCF yield.
The best OPM belongs to Scripps Networks Interactive Inc. The company's media portfolio includes such names as HGTV, the DIY Network and the Food Channel, among others.
Growth leader Discovery Communications Inc. is the world's No. 1 non-fiction media company with more than 190 television networks in over 220 countries.
Not only does Starz top the chart in the ROIC, it is the only company that has scored better than the averages in all five categories. The company provides premium subscription video programming on U.S. pay TV channels.
As always, do your own research before buying any of the companies listed here.