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Gabelli Confident About Investment in Cable Giants Discovery, Viacom

Appearing Tuesday on CNBC's Squawk Box, Mario Gabelli ( Trades , Portfolio ) offered several stock picks that he expects will double in the next five to 10 years, three of which are large media companies - Discovery ( NASDAQ:DISCA ), Viacom ( VIAB ) and CBS Corp. ( CBS ).

A common theme among the recommendations were strong CEOs and management, as well as stock prices that have declined over the past year.

Discovery's earnings will shoot up over the next five years, Gabelli said.

"You've got to own it," he said. "If you don't own it, then I'm glad you don't."

Gabelli pointed out that the stock will take time to increase due to currency headwinds. On July 22, Discovery took full control of sports broadcaster Eurosport International, in which it previously had a controlling 51% stake. It purchased the remaining 49% from French media company TF1 for ?491 million. However, the value of the euro to the dollar has dropped slightly since the purchase.

Still, the acquisition strengthens Discovery's position in sports programming, as well as its presence in Europe. The company also paid ?1.3 billion for the European broadcasting rights for the Olympics from 2018 to 2024.

EPS for the trailing 12 months is $1.42, while the graph below shows earnings have increased steadily over time.

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However, in FY 2014, Discovery's current liabilities outpaced assets for the first time, making for a weaker balance sheet. Gabelli is third-largest guru shareholder after Manning & Napier Advisors and Hotchkis & Wiley.

Cable and media businessman John Malone, whose Liberty companies have an interest in Discovery, has often received praise on Wall Street for his acumen, and Gabelli was no exception.

"I like the company. I like anything that John Malone has his fingerprints on," Gabelli said. "We've made a ton of money with him, and we continue to look at ways to participate with proven CEOs who know how to allocate capital."

He also praised Viacom's CEO Philippe Dauman, saying Dauman was the right leader to take the stock higher. Viacom closed at $44.02 at the close of trading on Tuesday and has dropped 44% over the past year. With earnings growing at 10% per year, Gabelli said he expects the stock to double in 7.2 years.

EPS has grown impressively over time and was $5.43 for FY 2014.

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With consolidation a major force in the industry right now, Gabelli said companies must "unbundle their bundles." A challenge, then, with going a la carte is how to price individual services. Viacom can be considered a winner in the media industry because it is not changing too quickly, and continues to produce content that is fresh and exciting, Gabelli said. Viacom's brands include Comedy Central, Nickelodeon, BET and MTV.

Viacom's sister company CBS is down 24% over the past year, with the stock closing at $43.67 on Sept. 8. Gabelli mentioned his confidence in CEO Leslie Moonves to lead the company, whose most high-profile show currently is the newly debuted "Late Show with Steven Colbert." The stock is arguably cheap with a P/E of 9.25 compared to the industry median of 21.2. EPS in 2014 was $2.41, down from $3.00 the year before.

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Larry Robbins (Trades, Portfolio) is CBS' largest guru shareholder with a 1.81% stake, while George Soros (Trades, Portfolio) is another notable investor.

No stranger to media companies, three of Gabelli's top 10 holdings are in the industry: DirecTV (NASDAQ:DTV), which is his largest holding, Cablevision Systems Corp. ( CVC ) and Time Warner Inc. ( TWX ). The Gabelli Asset Fund Class AAA had average annual returns of 8.67% over the past 10 years, compared to 7.89% for the S&P 500.

View Mario Gabelli (Trades, Portfolio)'s latest stock picks here. Not a Premium Member of GuruFocus? Try it free for 7 days.

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This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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