Walt Disney (NYSE:DIS) and Time Warner (NYSE:TWX) are two of the largest media companies in the world, but which one has the better stock? Let's compare Disney and Time Warner's core businesses, overall growth potential, and valuations to decide.

DIS Chart

Source: Ycharts.

Business breakdown and comparison
Disney's business is split into five divisions: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products, and Interactive (video games).

Image

Source: Compiled by author from DIS earnings report.

Time Warner has three main businesses -- Turner Broadcasting, HBO, and Warner Bros.

Image

Source: Compiled by author from TWX earnings report. (Excludes intersegment eliminations and corporate segments)

Disney clearly splits its TV and films businesses with its Media Networks and Studio Entertainment segments. However, Time Warner's broadcast and cable channels are spread across all three divisions, while its film segment remains within the Warner segment.

Therefore, we should compare the combined revenue and operating income from Disney's Media Networks and Studio Entertainment against all three of Time Warner's segments. Last quarter, revenue from Disney's Media/Studio segments rose 8.4% year-over-year, while operating income climbed 9.1%. Time Warner fared much worse last quarter, with only 3% revenue growth and a 38% decline in adjusted operating income. That drop was attributed to charges at Turner from "no longer airing" certain content, and was exacerbated by restructuring and severance charges across all segments.

What are the key businesses to watch?
On TV, Disney's biggest cable network is ESPN, and its main broadcasting network is ABC. Last quarter, ESPN struggled with contractual rate increases for sporting events, which caused programming costs to rise and the cable networks segment's operating income to fall 1% year-over-year. ABC also struggled with higher programming costs and lower advertising revenue, although affiliate growth and higher income from program sales boosted its operating income by 3%. Revenue at cable and broadcasting respectively rose 6% and 5%.

Last quarter, Time Warner's TV business posted decent top line growth but big bottom line declines. Revenue at Turner rose 5% as higher subscription and content revenues were offset by lower advertising revenues and higher programming costs. HBO's revenue rose 10%, thanks to higher subscription revenues, higher domestic prices, more subscribers, and the consolidation of HBO Asia from two divisions into one. Revenue at Warner -- which co-owns The CW with CBS -- climbed 3%. However, adjusted operating income plunged at Turner, HBO, and Warner -- respectively falling 65%, 4%, and 20%.

Image

ABC's Agents of SHIELD (L) and HBO's Game of Thrones (R). Source: ABC and HBO.

In movies, Disney has a much more reliable slate of films than Time Warner. Pixar, Marvel, LucasFilm and its own animation studios are all considered major growth engines. Recent successes include five in-house Marvel films -- which have grossed over $4.7 billion worldwide over the past two years -- and Frozen, the highest grossing animated feature in history. Star Wars: Episode VII will also arrive next year, providing the House of Mouse with another reliable stream of box office revenue.

Warner has a less predictable slate of films. Its Hobbit trilogy will conclude in December, and the studio is counting on a new series of Harry Potter spin-off films to stabilize its theatrical slate between 2016 and 2020. The fledgling "DC Cinematic Universe", which launched with Man of Steel in 2013, will continue to expand with Batman v. Superman: Dawn of Justice in 2016, but it's unclear if that comic book film universe will be as successful as Marvel's.

Fundamentals and growth
For a clearer comparison Disney and Time Warner's stocks, let's dig deeper into their fundamentals:

 

P/E (ttm)

5-year PEG

P/S (ttm)

ROE (ttm)

Fwd. annual dividend yield

Disney

21.1

1.2

3.1

16.6%

1%

Time Warner

17.1

1.1

2.1

15.6%

1.6%

Advantage

Time Warner

Time Warner

Time Warner

Disney

Time Warner

Source: Yahoo Finance, Nov. 13.

Those numbers suggest that Time Warner is a cheaper stock with a higher dividend, while Disney's higher ROE indicates that it is better at converting investor dollars into profits. However, when we compare the top and bottom line growth of the two companies over the past five years, the difference becomes clear.

DIS Revenue (TTM) Chart

Source: Ycharts.

Disney's top line growth is comparable to Time Warner's, but its bottom line growth is superior, which justifies the stock's premium P/E valuation.

The verdict
Disney's TV and film segments are more stable, consist of more organized franchises, and it can expand its media assets to other business segments like theme parks, video games, and licensed merchandise. Disney effortlessly shifts characters between these segments -- Marvel characters appear on TV (Agents of SHIELD, Agent Carter), in film, and digitally in Infinity's virtual toy box.

Meanwhile, Time Warner has trouble maximizing the growth potential of its franchises. Instead of connecting its DC films cohesively to a wholly owned network like TNT or HBO, Time Warner keeps most of its comic book characters in a separate universe on The CW. Game of Thrones also has huge growth potential in films, which Time Warner has only vaguely hinted at in the past.

Due to those differences, I believe that Disney is clearly a superior media stock to Time Warner, despite its pricier valuations.

 

Leo Sun owns shares of Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.