Private time for Time Warner

Compared to its peers, TWX's stock market and financial performance leaves a bit to be desired. In the last year, TWX stock is up 1.3% while News Corp rose 8.6%, Comcast fell 6.2%, and Disney moved up 2.9%. While TWX's average five year revenue growth of 29% has been strong compared to its peers, its 6.6% net profit margin has been middling. For example:

• News Corp revenues grew 13% and its net margin was 11.4% -- almost twice TWX's 
• Comcast's revenues grew 24% and its net margin was a much slimmer 4%
• Disney revenues grew a paltry 5% and its net margin was a TWX-beating 8.4%

TWX's future prospects and valuation do not suggest any reason to hope for the stock to rise. For example, analysts surveyed by Zacks expect TWX to earn $0.88 in 2006 and $1.03 in 2007, a 17% growth rate. At a P/E of 28, TWX may be over-valued. And compared to its peers, News Corp. is the only company that may be under-valued:

• News Corp., which trades at a P/E of 18, is anticipated to grow earnings at 24% to $1.04 in 2007
• Comcast, which trades at a P/E of 72, is expected to grow earnings at 42% to $1.11 in 2007
• Disney, which trades at a P/E of 21, is forecast to grow earnings at 12% to $1.63 in 2007

With such mediocre returns and paltry prospects, TWX shareholders could do far worse than to turn their investment over to private equity investors. Private equity firms have beaten the market over the long run. According to Venture Economics, they've generated 13.3% annual returns over the last 20 years -- handily beating the S&P 500's 8.6% return.

How might taking TWX private benefit investors? The answer depends on what assumptions you use. If private equity investors offered a 15% premium over the current market price, current shareholders at $17.48 would receive an immediate profit of $1.52. And shareholders who stuck around for TWX's restructuring under private equity management might earn a 15% average annual return if the company was taken public in five years. (Given that TWX's profits/employee are 52% of News Corp's $63,636, private equity firms have room to trim TWX's corporate girth). Under private equity management, that investor might hold shares worth $40. 

If current management increases TWX's share value at a faster rate than it has in the last year -- say 3.5% per year -- that same investor's shares would be worth $20.76 -- roughly half what private equity's management would deliver.

Which would you choose?

DISCLOSURE: I am neither long nor short Time Warner shares.  For more about me, click here.