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Time Warner Inc (TWX): This Company Is Always Coming in Second

Some would say that coming in second place is an accomplishment. Others would say that no one remembers who finished second, only who won. Depending on your point of view, looking at Time Warner Inc (NYSE:TWX) is either a total waste of time, or a potentially great investment. The company seems to finish second compared to their peers. Is that a good or a bad thing for investors? Let’s find out.

Time Warner Inc (NYSE:TWX)

The Best And The Worst
Sometimes in the market it’s easy to identify the leaders and the laggards. If someone asked me to name the best retailer, I might suggest Target Corporation (NYSE:TGT) or Ross Stores, Inc. (NASDAQ:ROST). If someone wanted to know who the worst retailer was, I would say J.C. Penney. These are companies where it’s easy to compare their performance and find clear differences where one is succeeding, and the other is failing.

However, there are some industries where the race between first, second, and third, is very close. In the entertainment business, there are four big players. Time Warner Inc (NYSE:TWX) certainly makes the cut, with their ownership of TBS, TNT, and others, along with Warner Bros. and their publishing division. CBS Corporation (NYSE:CBS) has to be included because they have “America’s most watched network.”

I would include Comcast Corporation (NASDAQ:CMCSA) because of their NBCUniversal business, which represents NBC and Universal Pictures and Studio. Finally, no entertainment discussion would be complete without The Walt Disney Company (NYSE:DIS), including ESPN, ABC, the theme parks, and Disney and Pixar pictures.

Time Warner Inc (NYSE:TWX) is the best at one thing among these four, and that is they produced better core operating cash flow (net income + depreciation) growth compared to their peers. While Comcast Corporation (NASDAQ:CMCSA) grew operating cash flow by 6.96%, Disney grew by 10.86%, and CBS Corporation (NYSE:CBS) grew by 12.87%, Time Warner crushed them all with 17.71% growth. If you like cash flow growth, Time Warner’s got it.

However, the company is also the worst of its peer group by one measure, and that is analysts expectations for EPS growth. Over the next few years, analysts expect Time Warner Inc (NYSE:TWX) to grow earnings by 12.43%, which is just behind Disney at 12.5%. CBS Corporation (NYSE:CBS) and Comcast Corporation (NASDAQ:CMCSA) show better expected growth rates at 13.62% and 17.5% respectively. If you want the fastest growing company, Time Warner is not it.

The “Seconds”
While it’s clear where Time Warner Inc (NYSE:TWX) places when it comes to cash flow growth and EPS growth, not much else is that straightforward. On the plus side, the company has repurchased a greater percentage of diluted shares than anyone except CBS in the last year. CBS Corporation (NYSE:CBS) repurchased 4.35% of their diluted shares, compared to Time Warner which retired 3.4%. Comcast Corporation (NASDAQ:CMCSA) got in on the act as well, by retiring 2.51% of their shares, while Disney’s share count actually increased by 0.61%.

Another positive is, Time Warner Inc (NYSE:TWX)’s relative stock value is second only to Comcast. Since each of the companies pays a dividend, I use the PEG+Y ratio. This ratio adds the yield, to the company’s growth rate, and then divides by their P/E ratio. A higher number represents a better value, because the company’s total return is higher relative to their P/E ratio.

By this measure, Comcast Corporation (NASDAQ:CMCSA) leads the way with a PEG+Y of 1.14 versus a score of 0.89 for Time Warner. The race for second is very close with CBS Corporation (NYSE:CBS) at 0.87, but Disney is the clear laggard with a score of 0.71. The point is, based on its P/E, yield, and growth rate, Time Warner Inc (NYSE:TWX) offers a decent value.

The bad news is, the company’s operating margin needs some work. Even if you exclude their lower margin publishing business, which is expected to be sold, the company’s margin comes in at 23.34%. This isn’t horrible, but the only peer with a lower percentage is CBS Corporation (NYSE:CBS) at 20%. By comparison, Disney’s margin of 23.77% is slightly better, and Comcast Corporation (NASDAQ:CMCSA) benefits from its high margin cable business, and has an operating margin of 29.85%.

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