Undervalued Stock of the Month — June

by Travis Johnson, Stock Gumshoe | June 13, 2007 4:43 pm

This is starting to be a trend — I’m now seeing the email from the Half Price Stocks guys every month about halfway through the month, touting their undervalued stock of the month. Previous ones were Broadcom and Getty Images[1], if memory serves … and today, another one arrives.

They call it a “Warren Buffet Value Stock” and say it’s 26% undervalued … so that sounds pretty tasty. Of course, they never mention whether Buffett actually owns it or not.

In their words …

“With a strong lineup of well-known brands, an enormous customer base, and nearly $8 billion in annual cash flows, this firm is one of the world’s most prominent media giants. However, due to market volatility, the shares have pulled back -76% from their all-time highs. As a result, bargain hunters now have a rare opportunity to pick up one of the world’s most dominant companies at a 26% discount below our estimated fair value.”

This company is a big media conglomerate, and “is either the #1 or #2 player in almost every conceivable media and publishing market — ranging from cable TV to Internet advertising to magazine publishing.”

They say that “the firm already controls the Internet’s top news site, top financial site, and top celebrity news site.” (some of that is debatable, but we’ll give it to them)

Finally, this company “owns some of the world’s most respected media brands, enjoys high operating margins of nearly 20%, is selling at a reasonable price/book ratio of just 1.4, and is now trading -76% below its all-time highs.”

Operating annual cash flow is $7.7 billion.

So that’s probably enough, right?

I agree. A few moments is all it takes for the Thinkotronic to churn through those numbers and tell us that this company must be …

Time Warner (TWX)

Boring, huh? Actually, this one has been getting a fair amount of attention from “value” analysts and touts lately, since the stock has treaded water[2] for so long and may well be finally monetizing that AOL stuff to some degree.

The huge numbers mean there are very few companies that could match these clues — especially the cash flow numbers. Time Warner’s operating margins are 18%, which I guess is “nearly 20%” if you want it to be. The operating cash flows for the last twelve months were $7.65 billion, which is just a rounding away from the tease.

The company actually looks quite cheap now, as would befit a value stock, with a trailing PE of just about 13 or so … but analysts are forecasting declining earnings for next year (earnings did decline last quarter, so perhaps they’re right), so the forward PE is a more “average” 17.

For their top sites, I expect they must be talking about CNNMOney, the celebrity one could be either people.com or TMZ, I suppose … don’t know which of their many is the top news site, could be CNN. I’d argue with some of those, but I don’t have the traffic data so I’d really just be blowing smoke.

Anyway … a well known company, a decent share price … the undervalued stock of the month? That’s your call.

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