Is Time Warner Undervalued?

Cecil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A strong share buyback has caused Time Warner's (NYSE: TWX) stock to increase over the past few months. The company had a solid outlook and strong cash flows from its main lines of business, so the question is if there's scope to grow? I believe so, and in this piece I’ll examine at few media companies and how they’re looking in an age where advertising revenues are ever-increasing.

Thanks to growing ad revenues, media stocks as a whole have been up in the past few months. The demand for quality content is also on the rise, thanks to increasing competition between pay-TV and other providers. The demand for Time Warner’s premium network HBO and its stable cable network revenues also show good scope for growth for the company.

Unlike the other companies we’ll be looking at, such as Disney (NYSE: DIS) and News Corp. (NASDAQ: NWS), Time Warner is a lot more reliant on its cable network revenues. Publishing, as is true for most other companies including News Corp, is a line of business that contributes very little to the bottom line when compared to other arms.

So within the cable network division, subscriber base is increasing and the annual increments in fee per subscriber is growing as well. If we look at the company as a whole, in 2011 66% of its cable networks revenue came from subscriptions. As an example, TNT's subscriber base has increased from 96.3 million in 2007 to 99.1 million in 2011, an increase of about 3 million in four years, which doesn’t seem to be too much. However, during that period its fee per subscriber increased from nearly $.90 a month to $1.16 a month. The annual increase in the fee per subscriber is predetermined as part of multi-year contracts.

Time Warner also has tremendous scope in the global market. Forget about developed markets such as the United Kingdom, Canada and Germany; these markets accounted for less than 17% of revenue. Emerging markets are a large opportunity, given the increasing appetite for pay-TV. Popular networks such as Cartoon Network provide content specific to that particular region, ensuring a large subscriber base.

The media sector offers possibility, which is why Disney also seems to be an attractive prospect. The revenue stream for Disney comes from 5 different sources, creating a diversified stream of revenue. The biggest of these segments is media networks, which contributes 46% of revenue and 67% of operating profit. This is mainly due to the large margins in the media networks segment (38%), as opposed to the division with the next highest operating margin, which was Parks and Resorts at 10% in the year 2011.

Disney has been doing well, and its ace in the hole, ESPN, has recently renewed its contract with the NFL. ESPN has the largest contribution to network cable sales, at 75%. The network is viewed in over 100 million US households, a point that gives it an advantage to charge affiliate fees in addition to advertising revenue. Another thing you can’t underestimate is the Parks and Resorts division. The fact of the matter is that to build a an amusement park of the quality and size of Disney Land would be challenging to anyone, and the amount of capital you’d need to invest would make most people balk at the prospect.

When you look at certain fundamentals of these three companies, you’ll see that Disney is in far better financial shape than News Corp and Time Warner. News Corp currently seems to be a little uncertain thanks to the fall out from the phone hacking scandal in the UK. However, its other UK interests, namely BSkyB, is still in good shape, thanks largely to the contribution to its bottom line from the Barclays Premier League rights, which it recently won. The P/E ratio for Disney is 16.62, not too far from Time Warner’s 16.87.

I’m optimistic on both of these companies, and I believe that Time Warner in particular is undervalued and can provide long term stability.


ceciljohn2002 has no positions in the stocks mentioned above. The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services recommend Walt Disney and Time Warner. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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