In an earlier article, I argued that Time Warner (TWX) was undervalued and deserved a "buy rating". Disney (DIS) similarly received a bullish review from me here. Since I first published the articles, the respective stocks have appreciated by 15.8% and 17.1%. Consequentially, now is a critical time to examine whether the media companies still represent a value investment. While nothing too significant has changed to the fundamentals, the market's assessment has shown a significant change and it is recommended that value investors use behavioral economics to their favor.
In my view, Time Warner remains the most attractive investment in this field. It trades at a respective 13.2x and 11x past and forward earnings, while Disney trades at a respective 14.5x and 11.1x past and forward earnings. Comcast (CMCSA) is the most overvalued, in my view, and it trades at a respective 16.6x and 12.5x past and forward earnings. In addition to having the lowest multiples, Time Warner also offers a significantly higher dividend yield than the other two at 2.71%.
Consensus estimates for Comcast's EPS are that it will grow by 18.9% to $1.51 in 2011 and then by 23.2% and 16.7% more in the following years. Assuming a multiple of 14.5x and a conservative 2012 EPS of $1.79, the rough intrinsic value of the stock is $25.96. This implies a 11.9% margin of safety and thus does not meet the threshold that I consider calling it a value play. Analysts nevertheless continue to rate it a "buy".
On the other hand, Disney is more in the gray territory. Consensus estimates for its EPS are that it will grow by 14.2% to $2.90 in 2012 and then by 14.8% and 14.1% in the following two years. Assuming a multiple of 14.5x and a conservative 2012 EPS estimate of $3.25, the rough intrinsic value of the stock is $47.13. This implies around a 28% margin of safety. Analysts rate shares between a "hold" and a "buy". While I agree with this assessment, I believe that it is much more undervalued than Comcast due to its stronger brand and support from customers.
Interestingly, both firms are working on park building. Comcast, which owns a majority stake in Universal Studios, will be developing a Harry Potter theme park in Hollywood. Its "Wizarding World of Harry Potter" in Universal Studios at Orlando, Florida has had stellar performance, with attendance reportedly skyrocketing by 50% or more. Perhaps a nod to the success of its competitor, Disney will be developing an Avatar theme park at its Walt Disney World in Orlando, Florida - making for an exciting marketing duel. Ultimately, I expect the odds are in Disney's favor due to the unrivaled scale and grandeur of its resort. Both the Harry Potter park in Hollywood and the Avatar park in Disney could cost as much as $500M each.
Consensus estimates for Time Warner's EPS are that it will increase by 17% to $2.82 in 2011 and then by 12.1% and 14.9% more in the following years. Assuming a multiple of 14.5x and a conservative 2012 EPS estimate of $3.10, the rough intrinsic value of the stock is $44.95. This implies a 29.5% margin of safety, which skews it more towards a "buy" than a "hold", in my view. Although Time Warner's viewership was down 7% versus 1% for Comcast, stronger ratings will lead to a recovery and close the former's discount to the latter.