In June and July, I started to look favorably upon Time Warner, Inc. (NYSE:TWX). I earned a few bucks simply by noting some basic fundamentals, most notably a price-to-book (P/B) value at 1.21, by far the lowest of our original eight bloggingstocks.com companies. It seemed obvious that the Adelphia cable deal would be a positive going forward, which is what we recently learned in TWX's latest earning report. That report also highlighted other positives, like increased advertising revenue at AOL.
At the time of my first positive observations, TWX was hovering around $17 per share. Now it is knocking on the $20 door and finding a little resistance. I look at charts sometimes but I am not a technical analyst. I look for value. The fact that there is some resistance at $20 is not important unless I can rationalize it based on some relevant facts.
Douglas McIntyre, a partner at 24/7 Wall St., and one of our more knowledgeable contributors at bloggingstocks.com, has been kicking around some of the same thoughts. I have italicized his comments from a dialogue we had today.
He made the following point: The adage is to "buy the rumor, sell the news." In the case of TWX, it would appear that the market has decided to "buy the rumor, hold on the news." The news that was good, the news on the cable unit and early signs of success at AOL, is now past. The earnings release for Q3 added little to what the market knew. The same was true with the bad news. The studio business and magazine operations are not doing well.
While Doug is looking at the earnings report, watching the market and investor reactions, I look at it from my own investment perspective. Maybe the fundamentals I was watching were meaningless and TWX simply moved up with the overall market -- could be. I choose to believe that the market moved up because the overall fundamentals of many companies improved at the same time that oil prices went down and interest rates were held in check.
When I look at TWX now, I see a P/B at 1.41 which is not unreasonable but it is higher. It is not the same bargain it was. The P/E ratio of 13.64 (at yesterday's close) is far below the market average of 18 to 19. What I do not like is its ROE, ROA and ROI (return on earnings, assets & investment) of under 5%. It seems to me that if these returns do not improve significantly then the stock is not worth more than current levels and may be worth less. For this reason, I think the stock price is likely to go horizontal for months -- until another positive earnings report indicates they are keeping some more of the huge amounts of cash flowing through the company.
Doug agrees: The market is going to simply sit on the TWX stock unless one of a very few things happens. One might be that the company could decide to sell the publishing unit. Very few investors would be unhappy about its passing, and the proceeds could be put against debt. Time Warner's stock has its needle stuck on "half full." At least that is better than the market's perception of six months ago.
If you are confident that TWX will continue to report increased profits, then this may be a buying opportunity. Furthermore, if you feel the market may retreat some over the next few months and you want to stay fully invested, then TWX might also be a safe place to park some money until spring. I, for one, don't expect to make much more money in this stock in the short term.
Disclosure: I own shares of TWX.
Interested in reading more? Check out my other posts for Blogging Stocks here.
Sheldon Liber is the CEO of a small private investment company and the vice president for Design and Research of an architecture & planning firm.
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Reader Comments (Page 1 of 1)
11-10-2006 @ 8:33AM
Michael Schneider said...
Time Warner does have potential catalysts near term. We are heading into the Christmas season which often has investors looking at film and DVD sales and TWX may finish better than they have been performing in that arena and the CEO says film looks good for next year at the company (see his comments from his recent interview with Jim Cramer at www.Barrelomedia.com). The main catalyst though could be continued good reports from AOL on the ad model they switched to recently. The main thing here is that the market may start seeing TWX as an more of an Internet stock which would cause the PE to increase.