The media and telecoms industries are dominated by a few gigantic conglomerates: Comcast, AT&T, Disney, and ViacomCBS are the biggest. These huge companies operate a diverse range of businesses, which makes it very difficult to value them. The best approach is a “sum of their parts” method, which involves breaking down the business into its core sectors and then applying multiples to each of those. We’ll explain with an example.️

Comcast’s key business lines are internet services, cable networks, broadcast TV, films, and its Universal theme parks. The image below shows how much profit each of those divisions made in 2018. We can then work out a suitable profit multiple for each segment by looking at those of the closest “pure-play” competitors – Charter Communications for cable, ViacomCBS for TV/film, and Six Flags for theme parks. Carrying those over to Comcast’s business units gives the company a total enterprise value of $332 billion – a lot more than the $270 billion its stock was trading for at the start of 2019.

That discrepancy can be partly accounted for by the discount investors typically apply to conglomerates. Their sheer scale leads to hefty operating costs – Comcast’s overall profit in 2018 was actually $2 billion lower than our graphic suggests, thanks largely to “Corporate and Other” expenses. And that scale also makes it harder for investors with a preference for just one sector to invest in: if you’re really enthusiastic about theme parks (investing, not attending) but hate cable and film, you’d probably rather invest in Six Flags than Comcast, even if you think Comcast’s theme parks are way better.

Pure-play companies like Netflix can command hefty premiums to their relative valuations. But media company bosses in search of scale and synergy hope that conglomeratization will ultimately help them succeed: Disney, for example, can only execute on its grand strategy by owning a wide range of businesses.

As an investor, you have to decide for yourself how much of a discount or premium to apply to a media company. You might think one firm looks overstretched, while another is pleasingly diversified. One of the best ways to analyze companies is to think holistically about the overall business: is it well positioned to do what it wants to do versus its competitors? If the answer’s yes, you might want to invest. If not… well, thankfully there’s a world of internet, video, and gaming content out there to occupy you instead.

In this Pack, you’ve learned:

🔷 Media and telecoms firms often share common owners, which is why investors tend to lump them into one gigantic but complicated sector.

🔷 Telcos either sell infrastructure or services, and in the face of high 5G costs they’re now looking to eke out extra revenue from new lines of business.

🔷 High interest payments mean that profit isn’t a particularly helpful metric for analyzing telcos – with investors using EBITDA multiples to compare stocks instead.

🔷 TV networks make money from advertising, subscriptions, and affiliate retransmission fees. Cord-cutting could hurt all of them, particularly affiliates and underwatched channels.

🔷 Investors look at EBITDA multiples to compare TV networks’ stocks, but finding suitable comparisons can be tricky.

🔷 Many new streaming services use content as a loss-leader to sell other products. That could pose a threat to Netflix, which relies solely on its content business.

🔷 Video gaming is a gigantic, lucrative industry that’s shifting to microtransactions, subscriptions and the cloud – and esports is attracting investors’ money too.

🔷 Valuing conglomerates is tricky, but one approach is to break them down into their constituent parts and then apply comparable multiples to each division. The whole is often worth less than the sum of its parts…