Valuation of Traditional Media: Time Warner

Today we look at the valuation of a traditional media company – in this case Time Warner (TWX). Traditional media may be an outdated description of a company that includes the AOL operating division and the recently acquired social network Bebo within its ranks. But maybe digital assets are now simply part of traditional media. Time Warner’s other operating divisions include: Cable, Filmed Entertainment, Networks and Publishing.

TWX Valuation

Time Warner grew revenues from US$39.5 billion in 2003 to US$46.5 billion in 2007 – a 4% compound annual growth rate. Our assumptions of revenues for the next three years are US$48.0 billion in 2008 growing to US$52.0 billion in 2010. We have projected EBITDA margins increasing from 22% in 2008 to 25% in 2010. We have used a terminal growth rate of 2%. We calculated this terminal growth rate based on year three growth of 4% dropping to a 2% stable growth rate by year 10. We used a terminal capital expenditure number of US$4.5 billion. We have used a WACC (discount rate) of 8.5%.

Valuecruncher Valuation TWX

Our analysis incorporates the cash and debt on the Time Warner balance sheet – Valuecruncher calculates a net debt number.

Our analysis gives a valuation of US$15.08 which is very close to the current share price of US$15.19.

Based on our analysis the current valuation looks about right. Play with our assumptions - what does your analysis say?

Disclosure: None.

Comments

[cranky investor]

"big moat" around 1/3 of properties in group should add $1.50 - $2 to overall value; would bring it to $17

[Snawatcher]

This is incredibly helpful. Thanks for posting! Your interactive valuation model is very sensitive to the terminal growth rate. For example, substituting the 2% rate you assume for a 4% rate currently experienced gives a valuation of $25 currently. This seems more approporiate to me. Quo Vadis?

[TradeRadarOperator]

Very nice model. I like the interactive aspect. It's been quite a while since I played with one of these equations, but isn't the discount rate a little high given today's interest rate environment? Lowering the discount rate slightly gives the present value of the stock a nice boost.