Time Warner vs Comcast – Scorecard

By Chad Henage - April 11, 2012 | Tickers: CMCSA, TWX | 0 Comments

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When you think of television stations like USA, NBC, E!, TNT, CNN, TBS, and HBO do you know who owns these stations? Do you know who owns movie studios like Universal Pictures and New Line Cinema? How about other properties and magazines like Fandango, the Philadelphia Flyers, People magazine, and Sports Illustrated? These sound like companies and brands that a big entertainment company like Disney would own. Maybe this is a stable of brands that a conglomerate like GE has its hands on, right? Would you believe that all of the above brands are owned by two cable companies, Comcast (NASDAQ: CMCSA) and Time Warner (NYSE: TWX). With entertainment properties beyond the cable pipe, investors would do well not to count these two out. With that in mind, let's compare the two and see which might be the better investment.

On the basis of projected earnings and valuation, it seems like Time Warner is the better deal. Though the company has the lower growth rate, it also sells for the cheaper P/E ratio. In addition, as we'll see later, the company's growth rate might be understated. For now we'll give this one to Time Warner. (Comcast – 1, Time Warner – 2)

Future growth is expected at about 12% and 14%, so you would think the prior growth rates of these two companies would be fairly similar. The fact is, one company's growth is expected to slow down, the other company is more of a turnaround story. Comcast has grown prior earnings at over 21%. Time Warner has shown prior earnings growth of negative 0.97%. There are a few factors in play here. First, Time Warner's prior growth has been impacted by a slower economy and by lower movie sales. Second, Comcast acquired NBC from GE and this added a significant boost to both prior earnings and to future earnings growth. (Comcast – 2, Time Warner – 1)

When it comes to earnings performance versus analyst estimates, the company that performs better should be valued higher. We can see which company has done better by the following:

Not only has Time Warner beaten earnings every quarter this last year, but they have beaten estimates by 6% per quarter. This is part of why I gave the very first category to Time Warner. While analyst expect earnings to grow by just under 12%, this 6% average beat makes me think earnings could come in just a bit higher. (Comcast – 1, Time Warner – 2)

While earnings performance is impressive, sometimes it can be manipulated. Cash flow shows a better picture of what a company can do for shareholders. While Comcast has inferior earnings versus estimates, the company generates relatively more cash flow than Time Warner. In the last year, Comcast generated $0.057 of free cash flow per $1 of assets versus $0.039 in free cash flow for Time Warner. (Comcast – 2, Time Warner – 1)

Since dividend yield is an important part of total return, it makes sense to compare dividend yield and growth. Comcast has a current yield of 2.22% and a 3 year dividend growth rate of 42.67%. Time Warner shows a higher yield at 2.88%, however their dividend growth is only 8.36%. With a lower yield, but much higher dividend growth, Comcast wins this category. Comcast has over $9 billion in free cash flow, and dividends of $1.5 billion this last year. The company can clearly continue a very high dividend growth rate. (Comcast – 2, Time Warner – 1)

With 5 tests complete, our scores are Comcast 8 and Time Warner 7. Comcast has slightly more diversification in the television arena, and their Universal Theme Parks division gives the company a play on the economy turning around. While Time Warner generates slightly more free cash flow, they aren't putting it to work by raising the dividend as much as they could. Considering the 8% versus 42% growth in dividends, this gives Comcast a big edge as an investment. While a lot of people like to hate cable companies, there is actually a lot to like about these companies prospects.

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