Time Warner's HBO has many hit series, including Game of Thrones. Source: Time Warner.
Time Warner (TWX) and Twenty-First Century Fox (FOX) (FOXA) 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, and Harry Potter; Fox has the X-Men, Planet of the Apes, and Alien. 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 Sky. 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 S&P 500 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
