Street Capitalist: Event Driven Value Investments

I came across a great interview with Nate Silver of Five Thirty Eight. What I liked most was that Silver highlights how the media is changing for electoral campaigns:

The rise of blogs at the expense of talk-radio could have some interesting financial implications. Media companies are transporters of content. They get paid by putting up advertisements. Think of ads in newspapers and the internet or commercials on the radio and television.

Silver’s proposal is that we’re seeing a coming of age for the internet as a content transporter and that blogs are becoming the new source of viral media. If you think about it, it makes sense. It’s easy now to transport viral media, you can quickly send out youtube videos that link people to videos of events and have millions of views in a few hours. I think that this is a big difference from the last time we saw a lot of internet hype – back in 2000.

Now, internet speeds for the average user are faster. According to the Pew Internet & American Life Project, broadband internet usage is about 57% for American adults. As a result, video content is much more easily accessible than it was in 2000. Video will always be more accessible and in turn more viral than a simple article and sites like YouTube make the transmission of such content extremely easy.

But how does this affect you as an investor? A few ways.

One of the companies I’ve spend a bit of time looking at is CBS (NYSE:CBS) — well really, the media sector all together. We know that traditional forms of media are on the decline, namely radio, TV, and newspapers.

CBS is really a play on radio and TV stations. A decline in usage will hurt their ad revenues, especially in an already distressed economic environment.

For a company like News Corp. (NYSE:NWS), the situation is different. There, investments have been made to keep the company quite competitive as we shift to a more internet heavy world.

Myspace alone averaged 67.7 billion page views for June of 2007. Conversely, collective properties owned by CBS only averaged about 7.3 billion page views in the entire year of 2007, or 10% of the monthly page views for MySpace. As one medium gains momentum, it usually eats away at the other. In this case, the internet versus TV and radio. This hurts CBS more than it does News Corp.

I saw that News Corp was trading at 4.75 EV/EBIT, with cash on hand (great for this environment) but using multiples doesn’t work as well when everything else in the sector is depressed. As a result, valuing media companies becomes tricky, but more exciting too. You have to normalize earnings from from different revenue streams – where some are trending down while others are trending up. It’s the main reason I’ve held off on investing in either of these companies so far, I’m having trouble figuring out how to peg their earnings for the next few years– but maybe one of you out there can give some input.