Most analysts are fairly bullish on Time Warner (NYSE: TWX) shares, despite bleak forecasts for advertising revenue this year. But this morning, Bernstein analyst Michael Nathanson downgraded the stock (to "Market Perform" from "Market Outperform"), saying the company's content business—- which will be what's left of TWX once Time Warner Cable (NYSE: TWC) is officially hived off as a separate publicly traded company—is overvalued. The report takes a fresh approach to appraising the content business, including sobering forecasts of long-term results at AOL and Time Inc. Here is what he says:
—Because Time Warner Cable is trading as a separate tracking stock and the cable results are still currently included in consolidated Time Warner results, it's possible to come up with a valuation for the content business alone. And that valuation suggests that Time Warner stock will be overvalued when the cable split is official.
—The Time Warner content stock is trading at 11.5 times price-to-earnings, a double-digit premium to comparable stocks. Nathanson says: "The relative decline of Time Warner Cable (down 6.4%) over this time frame versus the 3.3% gain of Time Warner translates into a 16% appreciation" in Time Warner's content business. He believes the stock has appreciated past the point of representing a good value.
—Nathanson assumes no long-term EBITDA growth for Time Warner content, a surprisingly bearish view even given near-term challenges at AOL and Time Inc., which he believes should cause the content shares to trade at a 10 percent discount to its peers. (They're currently trading at a premium.)
It is not news that the AOL and Time Inc. businesses are challenged, but Nathanson doesn't see signs of life in those units anytime in the next several years.
Nathanson's bottom line? "Longer term, the company will need to identify a better strategic vision."