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Investors burst old media's bubble

Some of the world's most powerful media companies are losing their glow.

During 2013, the likes of Viacom, Time Warner and Twenty-First Century Fox all posted phenomenal share-price performances, easily outpacing the broad market. While none had exceptional sales growth, they generated healthy amounts of cash that they piled into buying their own stock, boosting earnings per share.

But so far in 2014, most of the major media stocks remain underwater while the S&P 500 has risen about 2 percent. Even Comcast, which reported strong results Tuesday, has seen a slight share price decline so far this year. Comcast owns NBCUniversal, parent of CNBC.

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One problem for the group is that higher prices have become hard to justify given already-elevated valuations and only a modest growth outlook. Analysts expect both Time Warner and Viacom to generate roughly 5 percent annual sales growth between 2015 and 2017. While that would be a decent performance, both companies trade around 15 times forward consensus earnings, well above their respective five-year averages.

One standout: Twenty-First Century Fox. The company, which houses the film and television businesses of the former News Corp., has recently made several investments that give it a much faster growth trajectory.

Take Fox's investment in new cable network Fox Sports 1, which is seen as a rival to Walt Disney's ESPN. Major sports coverage is coveted by advertisers and cable companies because viewers tend to watch events live, a rarity in the age of DVR devices and on-demand video. Indeed, cable companies pay ESPN far more per subscriber than any other channel.

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Rupert Murdoch arrives at the 2014 Vanity Fair Oscar Party, March 2, 2014, in West Hollywood, Calif.
C. Flanigan | WireImage | Getty Images
Rupert Murdoch arrives at the 2014 Vanity Fair Oscar Party, March 2, 2014, in West Hollywood, Calif.

Even if Fox Sports 1 fetches a fraction of the carriage fees that ESPN commands, the impact would be significant. David Bank, an analyst with RBC Capital Markets, estimates Fox Sports 1 could generate over $1 billion in such carriage revenue by the company's year ending June 2017.

Of course, that growth comes at a cost in the near term. Investments in Fox Sports 1, along with an entertainment network called FXX and some Asian sports channels, will cost a combined $400 million to $500 million over the next couple of years, according to the company. Fox also just spent $680 million in January to increase its stake in regional sports network YES to 80 percent from 49 percent.

But such investments look different from some of Fox CEO Rupert Murdoch's previous deals like MySpace that wound up being big losers.

Fox already has plenty of experience in sports and is building these channels on its own rather than betting on unproven operators. That suggests the company can deliver on its target of more than $9 billion of earnings before interest, taxes, depreciation and amortization (EBITDA) by the end of fiscal 2016—a big jump from the consensus estimate for $6.7 billion in the year through June.

Fox still has to endure some ups and downs. Currently, about 30 percent of total revenue comes from advertising. The Fox broadcast network, in particular, has had a tough time recently as aging hits like "American Idol" have seen ratings drop sharply. But even a modest improvement could be enough to impress investors: Viacom saw a huge swing in its share price when ratings at its Nickelodeon network turned the corner last year.

What's more, Fox continues to have flexibility to make generous share repurchases. In the year through December, the company reduced its share count by 3 percent, giving earnings per share a healthy boost.

Over the next few years, the company can continue to purchase $4 billion to $4.5 billion worth of stock each year and still keep net debt below two times EBITDA, estimates Alan Gould, an analyst with Evercore Partners. Given the company's target of up to three times leverage, there will be billions of dollars in cash available for investing, repurchases or a bigger dividend.

Fox investors will need a little patience, given its recent investments won't bear fruit for another few quarters. But as the stock continues to drag, the opportunity looks brighter by the day.

—By CNBC's John Jannarone.

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