Time Warner Inc. (NYSE:TWX), on the other hand, is up 0.46% year to date as of 01/10/2018. It currently trades at $91.89 and has returned -0.80% during the past week.
Viacom, Inc. (NASDAQ:VIAB) and Time Warner Inc. (NYSE:TWX) are the two most active stocks in the Entertainment – Diversified industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect VIAB to grow earnings at a 5.76% annual rate over the next 5 years. Comparatively, TWX is expected to grow at a 8.88% annual rate. All else equal, TWX’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Growth in and of itself is not necessarily valuable, and it can even be harmful to shareholders if companies overinvest in unprofitable projects in pursuit of that growth. We will use EBITDA margin and Return on Investment (ROI), which adjust for differences in capital structure, as measure of profitability and return. EBITDA margin of 20.98% for Time Warner Inc. (TWX). VIAB’s ROI is 14.50% while TWX has a ROI of 12.90%. The interpretation is that VIAB’s business generates a higher return on investment than TWX’s.
The value of a stock is simply the present value of its future free cash flows. VIAB’s free cash flow (“FCF”) per share for the trailing twelve months was +2.19. Comparatively, TWX’s free cash flow per share was +1.29. On a percent-of-sales basis, VIAB’s free cash flow was 6.64% while TWX converted 3.43% of its revenues into cash flow. This means that, for a given level of sales, VIAB is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Balance sheet risk is one of the biggest factors to consider before investing. VIAB has a current ratio of 1.50 compared to 1.50 for TWX. This means that VIAB can more easily cover its most immediate liabilities over the next twelve months. VIAB’s debt-to-equity ratio is 1.84 versus a D/E of 0.85 for TWX. VIAB is therefore the more solvent of the two companies, and has lower financial risk.
VIAB trades at a forward P/E of 8.00, a P/B of 2.05, and a P/S of 0.96, compared to a forward P/E of 14.12, a P/B of 2.62, and a P/S of 2.34 for TWX. VIAB is the cheaper of the two stocks on an earnings, book value and sales basis. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
When investing it’s crucial to distinguish between price and value. As Warren Buffet said, “price is what you pay, value is what you get”. VIAB is currently priced at a 0.46% to its one-year price target of 30.67. Comparatively, TWX is -9.64% relative to its price target of 101.69. This suggests that TWX is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.80 for VIAB and 2.60 for TWX, which implies that analysts are more bullish on the outlook for VIAB.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. VIAB has a beta of 1.54 and TWX’s beta is 0.96. TWX’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
Analysts often look at short interest, or the percentage of a company’s float currently being shorted by investors, to aid in their outlook for a particular stock. VIAB has a short ratio of 4.53 compared to a short interest of 1.87 for TWX. This implies that the market is currently less bearish on the outlook for TWX.
Time Warner Inc. (NYSE:TWX) beats Viacom, Inc. (NASDAQ:VIAB) on a total of 7 of the 14 factors compared between the two stocks. TWX generates a higher return on investment, is more profitable and has lower financial risk. In terms of valuation, VIAB is the cheaper of the two stocks on an earnings, book value and sales basis, TWX is more undervalued relative to its price target. Finally, TWX has better sentiment signals based on short interest.