Is Time Warner (TWX) a Great Stock for Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Time Warner, Inc. TWX stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Time Warner has a trailing twelve months PE ratio of 16.81. This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.37.

If we focus on the long-term trend of the stock, the current level puts Time Warner’s current PE at about its median (which stands at 16.51) over the past five years. Moreover, the current level is fairly below the highs for this stock, suggesting that the stock is undervalued compared to its historical levels.

Further, the stock’s PE also compares considerably favorably with the Zacks classified Consumer Discretionary sector’s trailing twelve months PE ratio, which stands at 23.30. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers. In fact, the stock has historically always been undervalued than its peers.

We should also point out that Time Warner has a forward PE ratio (price relative to this year’s earnings) of 15.95 – which is faintly lower than the current figure. So it is fair to say that a slightly more value-oriented path may be ahead for Time Warner stock in the near term too.

PS Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Time Warner has a P/S ratio of about 2.63. This is slightly lower than the Zacks categorized Consumer Discretionary sector average, which comes in at 2.97 right now. In fact, the stock has always been relatively undervalued compared to the industry, in this respect.

Notably, TWX is actually in the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.

Broad Value Outlook

In aggregate, Time Warner currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Time Warner a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Time Warner is just 1.78, a level that is lower than the sector average of 1.89. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, TWX is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Time Warner might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘C’ and a Momentum score of ‘A’. This gives TWX a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen no estimates go higher in the past thirty days compared to four lower, while the full year estimate has seen three upward revisions and four downward revisions in the same time period.

This has had a just a small but meaningful impact on the consensus estimate though as the current quarter consensus estimate has inched lower by 5.2% over the past month, while the full year estimate has moved north by 1.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Time Warner Inc. Price and Consensus

Time Warner Inc. Price and Consensus | Time Warner Inc. Quote

This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.

Bottom Line

Time Warner is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. It forms a part of the Zacks Categorized Media Conglomerates industry, which ranks among the Top 29% out of more than 250 industries.

Notably, the highly competitive yet increasingly growing industry has outpaced the broader market over the last year, as you can see below:

Moreover, we believe that the merger offer made by AT&T, Inc. T in Oct 2016, bodes well for Time Warner shareholders and could provide certain strategic benefits. However, the market has already reacted to a large extent to the deal which is expected to close by the end of 2017, and thus the potential upside now seems limited.

So, value investors might want to wait for price to correct downwards a bit first, but once that happens, this stock could be a compelling pick.

8 Stocks with Huge Profit Potential

Just released: Driverless Cars: Your Roadmap to Mega-Profits Today. In this latest Special Report, Zacks’ Aggressive Growth Strategist Brian Bolan explores a full-blown technological breakthrough in the making – autonomous cars. He also spotlights 8 stocks with tremendous gain potential to feed off this phenomenon. Click to see the stocks right now >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
Time Warner Inc. (TWX): Free Stock Analysis Report
 
AT&T Inc. (T): Free Stock Analysis Report
 
To read this article on Zacks.com click here.