Time Warner Inc. Quarterly Valuation – October 2014 $TWX

500px-Time_Warner_wordmark.svgBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies to Research for the Defensive Investor - October 2014.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Time Warner Inc. (TWX) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Time Warner Inc. (Time Warner) is a media and entertainment company. The Company operates in three reporting segments: Networks, Film and TV Entertainment and Publishing. Networks consist of television networks and premium pay and basic tier television services and digital media properties. Film and TV Entertainment consists of feature film, television, home video and videogame production and distribution. Publishing consists of magazine publishing. In August 2012, Turner Broadcasting System, Inc. acquired Bleacher Report. In June 2014, the Company completed the spin-off of Time Inc.
TWX Chart

TWX data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price $78.77
MG Value $133.47
MG Opinion Undervalued
Value Based on 3% Growth $50.27
Value Based on 0% Growth $29.47
Market Implied Growth Rate 7.11%
Net Current Asset Value (NCAV) -$27.29
PEmg 22.72
Current Ratio 1.97
PB Ratio 2.72

Balance Sheet – June 2014

Current Assets $14,183,000,000
Current Liabilities $7,207,000,000
Total Debt $22,395,000,000
Total Assets $64,490,000,000
Intangible Assets $35,914,000,000
Total Liabilities $38,583,000,000
Outstanding Shares 894,200,000

Earnings Per Share

2014 (estimate) $3.93
2013 $3.92
2012 $3.00
2011 $2.71
2010 $2.25
2009 $2.07
2008 -$11.23
2007 $3.51
2006 $4.65
2005 $1.71
2004 $1.98

Earnings Per Share – ModernGraham

2014 (estimate) $3.47
2013 $3.09
2012 $1.70
2011 $0.65
2010 -$0.17
2009 -$0.87

Dividend History
TWX Dividend Chart

TWX Dividend data by YCharts


Time Warner qualifies for the Enterprising Investor but not the Defensive Investor.  The Defensive Investor has numerous concerns including the low current ratio, the lack of earnings stability or growth over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor’s only concern is the level of debt relative to the net current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities.  As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from a loss of $0.17 in 2010 to an estimated gain of $3.47 for 2014.  This level of demonstrated growth outpaces the market’s implied estimate of 7.11% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.

Be sure to check out previous ModernGraham valuations of Time Warner Inc. (TWX) for a better perspective!

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Time Warner Inc. (TWX)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Time Warner Inc. (TWX) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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