Media Stocks: Does Time Warner Outshine Disney?

Does Walt Disney Co. (DIS) still deserve to trade at a big premium to its media peers?

On Mar. 23, Goldman Sachs (GS) analyst Mark Wienkes downgraded the firm's recommendation on Disney shares to "neutral" and said its valuation premium—a measurement of how the stock should trade against its industry peers based on future earnings growth—should be 10% to 15%, vs. its current 25% or so. Wienkes, who wrote in his research note that he expects "mediocre" box office results for Disney in fiscal 2009, set his six-month price target at 20, down from 26. (Disney closed at 18.79 on Apr. 1.)

But the fortunes of one of Disney's big media competitors, Time Warner Inc. (TWX), may be looking up. Paul Greene, a media analyst at T. Rowe Price (TROW)—a major Disney shareholder—says Time Warner "has the most resilient media business in this economy."

Money in the Bank

Greene notes that two-thirds of its cable network revenues come from subscription fees, and cable stations aren't as dependent on ad revenues as their broadcast brethren. Overall, cable network revenues are expected to contribute about one-third of the company's revenues in the next 12 months.

Thanks to the success of box office smash The Dark Knight, Time Warner's studio division, Warner Brothers, had its best year in 2008. This summer's release of Harry Potter and the Half-Blood Prince is expected to add to profitability in 2009, Greene notes.

What about other Time Warner businesses? "AOL is a drag for (Time Warner), and publishing is not great," Greene says. But now that Time Warner Cable (TWC) has been spun off, Wall Street is focusing on the fate of the company's AOL unit. The appointment of Google (GOOG) veteran Tim Armstrong as AOL's CEO could signal that the Internet firm could be the next Time Warner business unit to be spun off or sold.

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