Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Time Warner Inc. vs. Twenty-First Century Fox

By Sam Mattera – Mar 28, 2016 at 11:07AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These two media giants are more alike than they are different, but one seems to have an edge.

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%.

FOX Chart

FOX data by YCharts

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

Sam Mattera has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Time Warner. The Motley Fool recommends Sky. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Time Warner Inc. Stock Quote
Time Warner Inc.
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.
Sky plc Stock Quote
Sky plc

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.