books about online stock trading, forex, futures, stock investing, market, trading systems
Pick Stock Hallmarks of Success in the Media Sector
Back to contents page

In general, the media sector is a great hunting ground for solid investment ideas. Here's how to find the best of the best.

Free Cash Flow

In general, we like to see free cash flow margins of at least 8 percent to 10 percent in this sector. This level of free cash flow indicates one of three things: the company has a product or service for which customers are willing to pay a premium, the company is very efficient, or the business doesn't require much ongoing capital investment. All three are attractive characteristics.

As always, use this as a general rule rather than an absolute one—if a media firm is investing heavily in a new business with excellent prospects, a low current free cash flow margin may be a worthwhile tradeoff for the prospect of faster growth in the future. For example, the Washington Post Company showed weak free cash flow in the late 1990s as the company plowed money into its Kaplan educational services business and into some of its cable properties. In 2OO2, this investment started to pay off, as free cash flow soared to 13 percent of sales. If you're looking at a media company with temporarily weak free cash flow, just make sure that the core business is still performing well and that you trust management's choice of where the excess cash is being invested.

Sensible Acquisitions

One of the characteristics that we look for in a media investment is a willing­ness and ability to make sensible acquisitions that lead to greater scale. We emphasize the word sensible because we're talking about smaller acquisitions that can be easily integrated into the acquiring firm's operations. We're not interested in companies that are always chasing after large firms in the quest to build an empire. And we also don't "want to invest in media firms that are looking to make a transforming merger. More often than not, these fail. The AOL/Tlme Warner merger is the classic example of a case where promised merger synergy didn't pay off for investors.

In general, beware of companies that are attempting large mergers predicated on synergies between unrelated businesses. These "growth" acquisitions rarely succeed, especially in the media business. Look for firms that stick to their knitting and make digestible purchases. Publishers Reed Elsevier and McGraw-Hill are examples of firms that have historically made many small, profitable acquisitions over time.

In addition, look for companies that can fund these acquisitions without causing too much damage to their balance sheets. This is another reason that strong free cash flow is so important, because the cash can be used to make acquisitions, reducing the need for outside capital.

Smarter trading The art of day trading Trading Chaos Sane Investing In An Insane World
Beat The Odds In Forex Trading