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Here is a look at how Time Warner (NYSE:TWX) fares in ModernGraham's opinion, based on an updated and modernized version of Benjamin Graham's requirements of defensive and enterprising investors from The Intelligent Investor.

Along with the rest of the entertainment & publishing industry, Time Warner is in a time of transition from print media to electronic media. It is easy to look at a company and make a decision about its prospects solely based on the products and brands which the company puts forth, and for Time Warner that may mean deciding that because CNN is a strong brand (which is debatable) the company is also strong; however, it is important to keep investment decisions based on facts and fundamentals. By using a ModernGraham analysis, one can maintain a systematic analysis across industries to easily compare one potential investment's risk level and opportunity for value against another potential investment.

Defensive and Enterprising Investor Tests:

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - FAIL
  3. Earnings Stability - positive earnings per share for at least 10 straight years - FAIL
  4. Dividend Record - has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - FAIL
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - FAIL
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - PASS
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

MG Value$119.17
MG OpinionUndervalued
Value Based on 3% Growth$44.88
Value Based on 0% Growth$26.31
Market Implied Growth Rate5.98%
Net Current Asset Value (NCAV)-$27.44
PEmg20.46
Current Ratio1.51
PB Ratio1.92

Balance Sheet - 9/30/2013

Current Assets$11,581,000,000
Current Liabilities$7,668,000,000
Total Debt$19,145,000,000
Total Assets$66,453,000,000
Intangible Assets$40,226,000,000
Total Liabilities$36,524,000,000
Outstanding Shares909,000,000

Earnings Per Share

2013 (estimate)$3.94
2012$3.09
2011$2.71
2010$2.25
2009$1.74
2008-$11.22
2007$3.24
2006$3.63
2005$1.86
2004$2.04
2003$2.04

Earnings Per Share - ModernGraham

2013 (estimate)$3.10
2012$1.69
2011$0.57
2010-$0.36
2009-$1.16
2008-$1.77

Conclusion:

Time Warner Inc. has vastly improved its EPSmg (normalized earnings) over the last 6 years. While the company remains unsuitable for the Defensive Investor, it is suitable for the Enterprising Investor. It fails to qualify for the Defensive Investor because of its low current ratio, its lack of earnings stability or growth over the ten year period, and its high PEmg ratio. It should be noted, though, that it barely qualifies for the Enterprising Investor as its current ratio is 1.51, just a tad higher than the 1.5 minimum requirement. Value Investors seeking to follow Benjamin Graham's methods should compare Time Warner to other companies, perhaps beginning with a review of ModernGraham's valuation of CBS Corporation (NYSE:CBS), and ModernGraham's valuation of Comcast Corporation (NASDAQ:CMCSA).

From a valuation perspective, the company looks very appealing. EPSmg have grown from -$1.77 in 2008 to an estimated $3.10 for 2013. This level of growth supports a valuation much higher than the market price, and the company would appear to be overvalued.

What do you think? What value would you put on Time Warner Inc.? Is the company suitable only for Enterprising Investors? Is there a company you like better?

Disclosure: The author did not hold a position in Time Warner Inc. (TWX) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Time Warner