Why You Should Buy Time Warner Inc. (TWX)

Outlook of the Media Industry

An improving U.S. economy continues to make investors optimistic about the future growth prospects of the media companies. Apart from Time Warner, three other companies should see positive growth from a rebounding entertainment industry — driven by healthy TV ad and subscription growth — Walt Disney, Viacom and News Corp.

Disney is offering significant value to investors at 16x trailing earnings, and it trades at an attractive 13x forward earnings. With the company’s recent purchase of the “Star Wars” franchise, Disney has renewed opportunities for cross selling and sports the ability to establish a lasting relationship with the next generation of movie-lovers.

Viacom’s advertising revenue (both domestic and international) dropped significantly, primarily due to serious concerns regarding the weak viewership ratings of its flagship Nickelodeon and MTV channels. Similarly, customers’ responses to new box-office releases of Paramount Pictures were lukewarm. But management is hopeful that its affiliate fee revenue and advertising revenue will accelerate from 2013. Further, Viacom is generating strong free cash flow enabling the company to raise its dividend rate and to pursue a systematic share repurchase program. The company is trading with a 14x trailing PE and a 9x forward PE.

News Corp is a solid value play that is expected to unlock value for shareholders in the near future with a spin-off of its TV operations. This media giant currently trades at a 22x trailing PE and 13x forward PE. With a solid expected long-term growth rate of 14%, News Corp’s PEG ratio comes in near 1.0.

Conclusion

At 2.4x LTM net EBITDA leverage, just under its 2.5x target, Time Warner sits at the sweet spot of financial flexibility. The company trades in line with its major peers at an 18x trailing PE, but only with a 12x forward PE.

In light of its mixed quarter, Time Warner increased its dividend by 11% to 28.75 cents per share, the fourth consecutive year of double-digit dividend increases. The company also announced a $4 billion stock buyback to reduce outstanding shares.

I believe that Time Warner is well positioned for long-term growth as it continues to benefit from its cable television-based business model, online streaming video services, and monetization of contents from multiple distribution platforms.

The article Why You Should Buy This Media Giant originally appeared on Fool.com and is written by Anindya Batabyal.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.