At first glance, Time Warner (NYSE:TWX) shares seem to offer little for investors. Trading on a forward price-to-earnings multiple of 18, the media conglomerate is priced roughly in line with its closest peers, The Walt Disney Co. (NYSE:DIS) and News Corp. (NYSE:NWS). What's more, with share price catalysts hard to make out, shareholders are unloading stock. Its value has sunk 25% in the past year.

All the same, investors who trouble themselves to take a closer look will find hidden value locked-away inside the folds of Time Warner's vast corporate empire.

Sum Of The Parts
In a step toward releasing some of its hidden value, Time Warner announced the spinoff of Time Warner Cable (NYSE:TWC) last week. I would wager that cable is just the first of Time Warner's businesses to be set free. If I am right that's good news, because, doing the math with a sum-of-parts valuation, Time Warner's parts are worth much more on their own than if they are lumped together. (To learn more, check out Use Breakup Value to Find Undervalued Companies.)

The Parts

Cable
Let's start with cable. Time Warner owns 84% of roughly 977 million Time Warner Cable shares. Based on a cable share price of $30, its parent's current stake in the cable spinoff is worth about $25 billion. But I'd say that number undersells the cable company - its solid Q1 results say as much. Putting the cable company on 2008 EBITDA multiple of 5, still a hefty 30% discount from where Comcast (Nasdaq:CMCSA) trades, values Time Warner's stake at about $31.5 billion.

Filmed Entertainment
Then there is Film Entertainment, home of Time Warner's movie studios and its cinema and DVD distribution businesses. Assuming flat growth this year, the group will produce about $12 billion in revenue with EBITDA margin of 10%. Based on a forward EBITDA multiple of 10-times, a point less than Lions Gate Entertainment (NYSE:LGF), the film group is worth about $12 billion.

AOL
Internet subsidiary AOL continues to perform abysmally, with revenues possibly falling by a percentage or two this year. Even so, it still should generate more than $4.5 billion in revenue. Naturally, it doesn't deserve Google's (Nasdaq:GOOG) 10-times sales multiple, or even Yahoo's (Nasdaq:YHOO) multiple of 7. But valued at just 3-times sales, the online business is worth at least $12.5 billion. Of note, Goldman Sachs analyst Ingrid Chung reckons AOL would fetch $13 billion if it were put up for sale.

Publishing and Networks
Growth at Time Warner Publishing, the group behind People magazine and CNNMoney, will probably end the year essentially flat, with revenue of about $5 billion and EBITDA of about $600 million. On a multiple of 5 times EBITDA, the publisher is worth about $3 billion. Finally, Time Warner Networks including Turner and HBO, which is set to deliver 5% revenue growth and EBITDA margin of 33%, is worth about $36 billion based on Viacom's (NYSE:VIA) multiple of 8-times EBITDA. (For related reading, check out A Clear Look At EBITDA and EBITDA Challenging The Calculation.)

The Sum
Throw in $4 billion of free cash flow projected for this year, then subtract the media giant's $22 billion of net debt, and voilà, Time Warner is worth about $77 billion or $21.50 - some 30% higher than what the market currently gives it credit for. Sum-of-parts analysis and the prospect of further spinoffs give investors a good reason to give the media conglomerate a second look.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!