This new feature of Modern Graham will look at companies that in our mind are over valued according to the principles of Value Investing and Benjamin Graham. This week’s choice is Time Warner Inc. (TWX), the conglomerate that includes America Online, cable companies, filmed entertainment, networks, and publishing. We will continue our analysis following Warren Buffett’s approach for the Business & Management Review. We will continue using Benjamin Graham’s investing styles to look at the financial aspect of the company.
Business & Management Review
1. Is the business simple and understandable?
Time Warner in its current state is due to the merger with America Online and since this action the company has suffered greatly. In the go-go late 1990’s it seemed practical for any company to merge or acquire any other just for the sake of doing so. Time Warner had no business entering the business that America Online was engaged in and this has proven correct in the fact that not only has the stock suffered, but there are serious talks of spinning off American Online in the near future.
2. Does the business have a consistent operating history?
Time Warner has historically been a strong company with its publishing and media divisions performing nicely in years past. This, however, came to a halt with the merger with AOL in the late 1990’s as it has affected share price and earnings. Only in the past three fiscal years has Time Warner had positive net income, and this can be correlated with the deal with AOL.
3. Does the business have favorable long-term prospects?
Unless Time Warner can get the figurative monkey off its back that is America Online, unfortunately they will continue their downward spiral with this loosing sector. America Online is continuing to loose market share to new ISP (Internet Service Providers) and this will only continue as prices decline and competitors increase. Years past, America Online offered a unique service to its members, but now it is obsolete. AOL has even come to admit this by offering what used to be pay services free of charge to anyone. The internet is becoming not a subscriber based marketplace, but has matured into an advertising epicenter.
4. Is management rational?
We believe that management is making some correct decisions in looking into accepting defeat and admitting their mistakes with AOL, but there is still much work that needs to be done to regain shareholder respect and trust. The company really needs new management to come in, reorganize the company, and restructure it taking advantage of the sectors that are money makers for Time Warner including HBO among others.
5. Is management candid with its shareholders?
This is one point that Time Warner is particularly efficient on, as it really provides their investors with a wealth of information. It provides not only typical annual and quarterly results, but debt holder information, stock splits and dividend information, and a nice question and answer section. The location of this site is: http://ir.timewarner.com/.
6. Does management resist the institutional imperative?
Looking at past actions, no, management has fallen victim to this. However, if management can reorganize the company, eliminate non producing sectors, become leaner and more profitable, then yes they can avoid this.
Financial and Value Review
Upon our review we find Time Warner to be unsuitable for both the enterprising as well defensive investor following Benjamin Graham’s principles. For the enterprising investor it does have a dividend history that supports it, but it does not have earnings stability, or in a general financial strong situation.
We believe the company is significantly overpriced and find it to be trading at over 300% of its intrinsic value.