A Big Media Stock May Return to Favor

07/18/2007 12:00 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, says a Mexican broadcaster’s undervalued stock may be ready to move higher.

Unlike investors in media stocks in the US and Europe, shareholders of Grupo Televisa (NYSE: TV) have never had to worry all that much about the competitive landscape. Televisa is far and away the dominant player in the Mexican television business with a 70% market share.

But shares of Televisa have been in a funk after a court ruling that may pave the way for new entrants in the Mexican media business. The decision might also make it tougher for Televisa to hold on to some of its broadcast licenses in the future. As a result, Televisa’s shares are down about 12% from a high of $31 a few months ago. Televisa’s shares have gained just 4% since the start of 2007, compared with a 22% gain for Morgan Stanley Capital International’s Mexico index. (The ADRs closed at around $28.50 Tuesday—Editor.)

Televisa is also struggling with very tough quarterly comparisons with revenue and earnings at the same time last year. In 2006, Televisa enjoyed unusually strong results that were boosted by World Cup soccer matches and coverage of Mexico’s hotly contested presidential election. After such a strong performance last year, it will be tough for Televisa to dazzle the market in the next few quarters.

But beyond these short-term issues, there’s still a lot of opportunity left in Televisa. The company may indeed face more competition, but it will remain an extremely well-positioned player in a very promising market.

Mexico’s population is young and the purchasing power of the middle class continues to grow. That’s an ideal environment for the development of many forms of media, especially things like cable and satellite television services. Penetration rates in both cable and satellite are relatively low in Mexico and have plenty of room to grow as the nation’s consumers move up the food chain.

Televisa is very strong in these growth areas as well. Its Sky Mexico satellite television business, which accounts for about 20% of revenue, has 1.4 million subscribers and is the satellite market leader. Its Cablevision cable television business has about 1.8 million subscribers and also is a leading player.

The company recently completed the conversion of its cable network from analog to digital [and it can now] offer so-called “triple play” packages of cable, telephone, and Internet access.  And since Televisa produces its own programs, it [can] “export” content to other Spanish-speaking markets worldwide.

The company’s financial position is remarkably solid. Last year Televisa earned $790 million of net income on revenue of $3.5 billion, [while] operating profit margins expanded to 43.3% from 40.7% in fiscal 2005. Return on equity is a robust 26%. Televisa also has a clean balance sheet. It should have about $500 million of cash and equivalents minus total debt this year. If anything, one could argue that Televisa is underleveraged, but in the current environment that might not be the worst problem to have.

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