It’s no secret that the media industry has been deeply affected by the advent of the Internet. It is the most efficient distribution channel ever for consumers to read, listen, and watch content. Newspapers and magazines continue to give way to online content outlets, airwaves are being replaced by Internet radio, and television programs and movies are increasingly being watched on the Internet.

The online shift is wreaking havoc on companies that have invested heavily in owning publishing houses, radio stations and television networks. As a result, many will be less profitable than they were. Many may eventually go out of business.

But those that control the content don’t care much how consumers end up obtaining it. In fact, advertising is proving to be quite lucrative in cyberspace and can mean similar levels of revenue for the providers that count on it to justify the costs to create content. Additionally, worries that online video from the likes of YouTube would eat into the profits of large entertainment houses have proven unfounded, as consumers can easily distinguish between amateur and professional content.

With that, here are five leading media firms that focus on creating shows, movies and related entertainment that should prosper in this new era of media.

1. Viacom Inc. (NYSE: VIA) (NYSE: VIA-B)
Forward P/E: 14

Viacom owns an impressive array of entertainment content and broadcasts it on its own television channels including MTV, Nickelodeon and Comedy Central. This segment is known as “Media Networks.” It also owns Paramount Pictures is part of its “Filmed Entertainment group.” The company should be commended for its forward thinking: it spun off Blockbuster video and CBS Corp. (NYSE: CBS), effectively eliminating two firms that distributed movies and programs via retail stores and television stations, two mediums that are being ravaged in the new media age.

Advertising spending plummets during recessions and it’s likely to recover during the next couple of years, Viacom’s shares should continue to see upside. Additionally, Paramount entertainment has been struggling and could benefit from a few movie hits, such as from the critically-acclaimed “True Grit” western film.

2. News Corp. (NYSE: NWS) (NYSE: NWS-A)
Forward P/E: 13

News Corp. is a media juggernaut that owns cable network programming, the 20th Century Fox movie studio and the Fox TV network. The company still operates as a traditional media distribution company by owning newspaper publishers and satellite broadcast TV providers in Europe, but it continues to use the cash generated by these businesses to fund content and faster-growing operations.

News Corp.’s investment appeal stands out because of its global focus and appealing valuation. At about 13 times both earnings expectations and free cash flow for last year, it is among the cheapest of its large media content peers and is ahead of the game in terms of expanding in Europe and Asia.

3. Time Warner (NYSE: TWX)
Forward P/E: 14

Like Viacom, Time Warner has been in transformation mode in recent years. It finally jettisoned AOL after a disastrous merger that focused on outdated Internet distribution and spent some time shedding its cable television distribution assets. What remains are valuable network television, film and publishing assets: HBO is an extremely valuable cable brand, as are the Turner Networks on cable (such as TBS and TNT), Warner Bros.’ movie studios and a number of magazine brands that have succeeded in going online.

With some of the best channels on cable television, the stock is appealing at just over 14 times earnings expectations. Cash flow generation is strong, and profitability is likely to continue to improve now that the slow growth and capital intensive divisions have been spun off.

4. Discovery Communications Inc. (Nasdaq: DISCA)
Forward P/E: 22.5

Discovery owns about 100 television channels, including the Discovery Channel, TLC, Animal Planet, and FitTV. Its newest network is the Oprah Winfrey Channel, or OWN, of which it owns 50%. Oprah owns the other half. I’m still working through the value of the potential upside if OWN really takes off, but even without the new network, there is significant value in Discovery’s existing shows and channels.

The forward P/E of 22.5 suggests that much of the potential upside from OWN is already priced into the stock, but cash flow has been above earnings, given the company has been selling off non-core assets during the past couple of years. Last year, free cash flow was about $2 per diluted share, so the trailing free cash flow multiple is more reasonable at less than 20.

5. Lions Gate Entertainment Corp. (NYSE: LGF)
Forward P/E: 52.2

Lions Gate is one of the smaller content players, but it has had great success in creating successful niche films and television shows. The company’s film content includes the “Saw” franchise, while the critically acclaimed “Mad Men” is one of its television creations.

Legendary billionaire investor Carl Icahn’s interest in the company is indicative of its investment appeal. The company has had some issues reporting consistently positive earnings, but the business requires very little capital to operate and could start showing big returns from the many hit shows and movies it is creating. Icahn could also decide to acquire the company for a premium.

Action to Take –> The fact that a number of the above firms shed businesses tied to content distribution should only serve to illustrate where the value is in the media industry. These media providers are appealing for the power of their content, which can be viewed by consumers that are willing to see advertising, and to pay to download and view shows online.

An improving advertising environment and online growth are the two primary catalysts for the stocks going forward. Viacom and News Corp. currently look the most appealing, given their reasonable valuations and world-class media assets. Time Warner is not far behind and has the potential to boost profits significantly going forward. Discovery Communications and Lions Gate are the biggest wild cards, but have plenty of upside potential. Discovery could report big gains should OWN really take off, while Lions Gate could get acquired for a premium to the current share price.

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