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Better than Expected Bottom-Line Results - A New Leader in Family Entertainment?

November 25, 2013 | About:
In a previous article we analyzed a media giant in the $1 trillion global media industry, which includes advertising, cable, film, newspapers, radio and television. Now, let´s take a look at a rival and see the reasons why hedge fund managers considered it a good investment.

Time Warner Inc. (TWX) operates as a media and entertainment company in the U.S. and internationally. The company operates in three segments: Networks, Film and TV Entertainment, and Publishing.

Strategic Investment Partnership

Warner is looking to capitalize on the growing Chinese media and is investing about $50 million in the fund, China Media Capital. China is one of the most important markets for entertainment companies. "This partnership with CMC will give us a unique window into one of the world’s largest and fastest growing media and entertainment markets,” said Time Warner Chairman and CEO Jeff Bewkes.

A New Cloud-Based Digital Film Service

The company launches a digital movie technology, UltraViolet, which makes it possible for DVD buyers to also access movies remotely. The new tech allows people who buy compatible DVDs and Blu-ray discs to also get a copy of a movie stored online that they can access on compatible Internet-connected devices. The new technology will encourage people to keep buying movies, instead of renting or worst of all illegally pirating them. This holds tremendous potential for the company.

Valuation

In terms of valuation, the stock sells at a trailing P/E of 16.6x, trading at a discount compared to an average of 19.8x for the industry. Analysts’ expectations imply a forward P/E of 15.73. To use another metric, its price-to-book ratio of 2.06x indicates a discount versus the industry average of 2.34x and the price-to-sales ratio of 2.17x is above the industry average of 1.84x.

Earnings Per Share (EPS) rose by 32% in the most recent quarter compared to the same quarter a year ago ($1.1 vs $0.84). Also, it has demonstrated a positive trend in EPS growth over the past two years as shown in the next graph. We include the stock price because growing EPS often lead to appreciation in share price.

729044783.jpg

Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The company has a ROE which is at a level of 10.1% and is higher than 75% of the companies in the industry. This valuation might attract investors.

Final Comment

In the third quarter the company appears to be in a bullish trend, sales and net income have grown faster than the average competitor in its industry compared to the same quarter a year ago, and we expect this trend continues in the future.

Hedge fund gurus John Burbank, Scott Black and Julian Robertson added this stock to their portfolios. I would advise fundamental investors to consider adding Time Warner to their portfolios as it seems to be an attractive option.

Disclosure: Damian Illia holds no position in any stocks mentioned

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


Rating: 4.8/5 (6 votes)

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