Pass On Time Warner
Andrew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Lately there has been a lot of buzz going on about Time Warner’s (NYSE: TWX) pending earnings release. The consensus among analysts is the earnings for the previous quarter will be $1.20, which is a 21% increase from the same quarter a year ago. The analysts are also anticipating revenue to increase by 3.5% for the previous quarter rising to almost $5 billion. These numbers alone paint a cheery picture of good things for Time Warner. I am not convinced.
There is no denying that positive things have been happening for Time Warner. Their earnings have increased and their stock price has risen by almost 15% over the past year. However, the question that I find myself asking when looking at this information is, why?
Buying stock is similar to any other consumer purchasing decision. The buyer wants to feel like they have received good value for a fair price. For me that translates to purchasing a fundamentally sound and tangible company. Simply put, Time Warner doesn’t provide me with that sense of satisfaction, and would probably leave me with buyer’s remorse.
The biggest indicator that makes me skeptical of Time Warner is their free cash flow. Over the past four quarters Time Warner has managed to record $2.3 billion in FCF, and $2.9 in net income. Free cash flow only represents approximately 80% of the total net income for the period. Hardly impressive considering for three straight quarters Time Warner saw a substantial decrease in FCF. In comparison, Comcast’s (NASDAQ: CMCSA) free cash flow for the same period was four times greater than their net income. Even DirectTV (NASDAQ: DTV) managed to muster free cash flow that was approximate to their net income.
Another worrisome component to Time Warner is their lack of tangible assets. After deducting out all intangibles, which account for approximately 60% of their total assets, Time Warner is left with a tangible net worth of ($9) billion. Granted, Time Warner plays in the service industry, but competitors such as Dish Network (NASDAQ: DISH) has a tangible net worth of approximately $100 million and even DirectTV has a greater tangible net worth compared with Time Warner by almost $2 billion.
As previously mentioned, there is no denying that Time Warner has been lighting up the earnings board. Earnings are only one part in the purchasing decision process. There are many other factors that are seemingly ignored or understated when discussing the stock performance. For Time Warner, the lack of tangibility and the lack of a solid fundamental base makes the purchase decision (of lack thereof) that much easier.
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