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Better Buy: Comcast Corporation vs. Time Warner

By Tim Beyers - Mar 2, 2016 at 10:22AM

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Does distribution matter more than content? Two entertainment titans face off to see which is the better stock to add to your portfolio right now.

Warcraft and Suicide Squad movie posters

For both Comcast and Time Warner, minor properties such as Warcraft and Suicide Squad are important. Credit: Legendary and Universal Pictures and Time Warner and DC Entertainment.

Entertainment is a business in which profits tend to flow those who own the most pieces of a successful franchise. But even a good franchise can't get the play it needs without the help of a distribution network.

Today's stock battle features a bit of both. Comcast (CMCSA 0.77%) gets 75% of its annual operating income from handling televised programming. Time Warner (TWX) gets 48% of its operating income from movies and the unique blend found on HBO.

Which of these stocks is the better buy right now? Answering that question requires a closer look at the management, financial condition, and valuation of each company. Shall we dig in?

Content or distribution? The tale of the tape ... 
You may notice that there are huge disparities in some areas. That's to be expected. Only half of Comcast compares to Warner's content and licensing operations. The other half is better compared to Time Warner Cable (NYSE: TWC). Nevertheless, if we're going to choose, it's important to get a clear understanding of the financial picture for both candidates:

MetricComcastTime Warner
CEO / tenure Brian Roberts / 13 years, 3 months Jeffrey Bewkes / 8 years
Insider ownership 0.16% 0.16%
Cash / debt (millions) $2,401 / $52,621 $2,155 / $23,792
Cash from operations (millions) $18,778 $3,843
Long-term projected earnings growth 12.08% 13.9%
Market cap (millions) $140,535.6 $52,549.5
Current P/E ratio 17.76 14.45

Now that we have the numbers it's time to draw some conclusions, which we can organize into three key areas:

  1. Management commitment and quality. Comcast chief Brian Roberts has more than a decade of experience navigating the turmoil that comes with running a national cable operator. He's also overseen the company's acquisition of NBCUniversal, which gave Comcast content to go with its massive distribution network. At Time Warner, chief Jeff Bewkes's shorter and more tumultuous reign includes failing to fully capitalize on the company's DC Entertainment subsidiary and snubbing Rupert Murdoch's $80 billion buyout offer. (A similar offer today would result in a better than 50% gain for current investors.)
  2. Financial condition. Murdoch can hardly be blamed for making a bid for Warner. Not only does the studio have terrific assets and a proven history, but it's also on the growth track. Analysts expect 13.9% annualized growth in profits over the next three to five years, yet the stock trades for just 14.45 times earnings. Investors aren't demanding a premium; maybe it's time for Murdoch to open the checkbook again? By contrast, Comcast is a giant business that's priced higher (17.76 times earnings) but is positioned to deliver less growth (12.08% annualized over the next three to five years).
  3. Valuation. Finally, look at the size of both businesses. Warner is frequently compared not only to Comcast but also Walt Disney (DIS -1.40%), yet at $52.5 billion in market cap commands a fraction of the value of either of its larger peers. (Just over $140.5 billion for Comcast and $155 billion for Disney.) Monetizing the DC assets alone could shrink the gaps materially, enriching investors.

Finally, let's not forget the stock action, since winners tend to keep on winning:


CMCSA data by YCharts

And the better buy is ...
Comcast's stock has performed well in an admittedly choppy market. That counts for something when you look at history. And yet, to me, Warner looks like the better buy when you consider its valuation and market position.

Mix in a potentially explosive box office performance for Batman v. Superman: Dawn of Justice and I'd expect Time Warner stock to be a sound market beater over the next year, and perhaps well beyond.

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Stocks Mentioned

Time Warner Inc. Stock Quote
Time Warner Inc.
Comcast Corporation Stock Quote
Comcast Corporation
$39.88 (0.77%) $0.30
The Walt Disney Company Stock Quote
The Walt Disney Company
$96.41 (-1.40%) $-1.37

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