Has Time Warner Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, and then decide if Time Warner (NYSE: TWX  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Time Warner.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

Five-year annual revenue growth > 15%

(8.5%)

Fail

 

One-year revenue growth > 12%

3.9%

Fail

Margins

Gross margin > 35%

43.6%

Pass

 

Net margin > 15%

9%

Fail

Balance sheet

Debt to equity < 50%

67.5%

Fail

 

Current ratio > 1.3

1.52

Pass

Opportunities

Return on equity > 15%

8.5%

Fail

Valuation

Normalized P/E < 20

15.52

Pass

Dividends

Current yield > 2%

2.3%

Pass

 

Five-year dividend growth > 10%

8.4%

Fail

       
 

Total Score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Time Warner last year, the company has kept the same four-point score. But the stock has soared more than 55% over the past year as investors have applauded its move to streamline its operations and focus on its best moneymakers going forward.

Time Warner is just a part of what it once was, having spun off both its online portal AOL and its Time Warner Cable division. What's left are its film and TV studios and its HBO and CW networks, along with its publishing division.

Right now, Time Warner is in an appealing position. With Netflix (Nasdaq: NFLX  ) and Amazon.com (Nasdaq: AMZN  ) duking it out for the right to deliver content to customers via Internet streaming, Time Warner and its fellow content producers have a lot of leverage.

One big play Time Warner is making is on the full DC line of superheroes. Just as Disney (NYSE: DIS  ) has found a goldmine in its films based on Marvel Entertainment characters, Time Warner is looking to make films based on the Justice League of America, which includes characters like Superman, Batman, and Wonder Woman. If the films get even a fraction of the following that Marvel's Avengers have enjoyed, it could boost the studio's profits substantially.

The big question, though, is whether HBO can maintain its premium cable status. With Liberty Media (Nasdaq: LMCA  ) suggesting that it might shop around for a buyer for its Starz network, some analysts see the writing on the wall for premium movie channels in general.

For Time Warner to improve, it needs to focus on its biggest growth opportunities for its movie studio and make the most of its content production. If it can succeed, the stock looks reasonably valued even after its big jump.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfection than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

The key to understanding the value of Time Warner's content is watching how much Netflix and its rivals are willing to pay for it. Learn more in the Fool's premium report on Netflix. You'll get the latest on the company's recent moves, including deals for content that will affect Time Warner's future prospects. Click here and get your copy today.

Click here to add Time Warner to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Netflix, Amazon.com, and Disney. Motley Fool newsletter services have recommended buying shares of Disney, Netflix, and Amazon.com, as well as creating a bear put ladder position in Netflix. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy. Try any of our Foolish newsletter services free for 30 days.


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