Trading Time Warner for Comcast Corp (CMSCA)
Time Warner Inc. (TWX) last quarter performance was uninspiring to say the least. After a nice gain in 2006, we are less than optimistic this year will yield similar performance. Thus, we have lowered our expectation for 2007. The stock buybacks was a great way to boost the flagging stock price in 2006, but it is merely a temporary boost. Over the long haul, revenue is the only way to drive shareholder value. Last quarter performance had too much “window dressing” for our taste.
While the headlines might suggest TWX is doing well as the company achieved 34 percent higher revenue than previous year, upon closer inspection one will realize the numbers are not of “quality” earning. Without the one time income from the sales of a business unit, the number is actually very poor. Moreover, the revenue from most of their business units showed no momentum.
From our perspective, TWX share will unlikely go much higher, but the chances of it going lower is much greater. This stock is no longer a buying opportunity. It is time to move on to something else as leaving money invested in TWX will result in huge opportunity cost.
If cable interests you, our recommendation is to consider trading in your TWX for Comcast (CMCSA). Comcast is on a roll. After investing heavily to upgrade their infrastructure, the company is now well positioned to take advantage of the digital revolution. The “triple play”, which includes Cable, Internet and Voice over IP (VOIP), appears to be gaining momentum. Their growth has been evident in recent earnings, where CMCSA surpassed expectation on the top line, but slightly missed the bottom line. Albeit the lower than expected EPS, we see this as s temporary setback as the company needed to provide incentives to lure new customers. We also see the temporary cost of continuing to invest in their infrastructure as a normal part of doing business. It is not unusual for companies to spend up front in order position themselves for the future. Trading at around $42 per share (pre-split), we believed this stock has the potential to test $50 in about 6 months.
