Time Warner's HBO has many hit series, including
Game of Thrones
. Source: Time Warner.
Twenty-First Century Fox
have a lot in common. Both are media giants with extensive
assets. Both own major film studios and cable networks. And
both have market caps of just over $50 billion.
But which is the better pick for investors? Let's take a
closer look at each business, comparing valuation metrics and
assets to see which one may be more attractive
Assets and ownership
In July 2014, Twenty-First Century Fox announced that it would
be interested in acquiring Time Warner. Obviously, the deal
never went through, but the proposal had merit in the sense
that both businesses have significant overlaps.
The "Warner" in Time Warner's name derives from its
ownership of Warner Bros., one of the world's largest film and
television studios. Last quarter, it generated just over $3.3
billion, or about 40% of Time Warner's revenue. For its part,
Twenty-First Century Fox owns 20th Century Fox, a studio of
similar size and scope. It brought in about $2.3 billion for
Twenty-First Century Fox last quarter -- about 30% of the
firm's revenue. Both studios boast impressive intellectual
property: Warner holds the rights to Batman,
The Lord of the Rings
; Fox has the X-Men,
Planet of the Apes
. Notably, Warner has
a growing video game operation
, a distinguishing feature Fox lacks.
Time Warner's Turner segment is composed of its traditional
cable channels, including CNN, Cartoon Network, TBS and TNT.
Turner brought in about one-third of Time Warner's revenue last
quarter, through a combination of advertising and subscription
revenues. Fox boasts an arguably even more impressive stable of
cable channels, such as FX and the Fox News Channel, and also
owns the Fox Broadcasting Company. Through a network of
affiliates, Fox collects retransmission and advertising fees.
Both companies sell their channels internationally, but Fox has
more extensive dedicated holdings -- Fox's STAR, for example,
dominates the paid-TV market in India. The combination of its
cable channels and broadcasting network generated the other 70%
of Fox's revenue last quarter, or about $5.4 billion, while
Turner brought in just $2.7 billion.
After that, the firms begin to diverge. About one-fifth of
Time Warner's revenue last quarter was generated by Home Box
Office, which owns both HBO and Cinemax. These networks differ
from other traditional cable channels by depending wholly on
subscription revenue, and place a strong emphasis on quality
original programming. Fox has nothing truly comparable to HBO,
but it has some interesting assets that Time Warner lacks. Fox
owns about one-third of the Internet streaming service Hulu,
and almost 40% of the British telecom
. It also owns parts of Tata Sky and half of Shine Group (a
British television company).
Fox has a unique shareholder structure, with two classes of
common stock: class A and class B. Owners of class B shares
have a say in the makeup of the company's board of directors;
those with class A shares do not. The Murdoch family owns
almost 40% of Fox's class B shares, giving them effective
control of the firm. Rupert, Lachlan, and James Murdoch hold
key executive positions. In other words, buying Fox shares
means placing your trust in the Murdochs.
Time Warner, in contrast, has no controlling investors. That
leaves the firm vulnerable to a challenge from an activist
shareholder. Several reports have suggested that such a
challenge could be coming in the near future, though it remains
mere speculation for the time being.
Time Warner is cheaper
Both firms are profitable, which means investors can assess
them using traditional valuation metrics, including trailing
and forward price-to-earnings ratios. On that basis, Fox is
more expensive than Time Warner. Currently, its trailing P/E
ratio of 23.7 is quite a bit higher than Time Warner's 15.13.
Both stocks pay a dividend, though neither is particularly
large. Still, to its credit, Time Warner is yielding about 2.2%
compared to Fox's 1.07%.
Both stocks have significantly underperformed the broader
over the last 12 months, and could be poised for comebacks. For
now, I would give the edge to Time Warner. In an era of
Internet streaming, HBO is an interesting asset
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Better Buy: Time Warner Inc. vs. Twenty-First
originally appeared on Fool.com.
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