Is Time Warner a Hot Stock?

With shares of Time Warner (NYSE:TWX) trading around $83, is TWX an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Time Warner is a media and entertainment company. The company operates in three reporting segments: Networks, Film, and TV Entertainment and Publishing. Networks consist of television networks, premium pay, basic-tier television services, and digital media properties. Film and TV Entertainment consists of feature film, television, home video, and video game production and distribution, while Publishing consists of magazine publishing. Through its segments, Time Warner is able to move audiences around the world. With such a large and growing audience, look for Time Warner to continue to drive profits through its media and entertainment.

21st Century Fox (NASDAQ:FOXA), a film and TV company controlled by Rupert Murdoch, offered to buy Time Warner last month for about $80 billion, a deal that would combine two of the largest players in the cable network business and possibly unleash a wave of consolidation among content producers. Time Warner said in a statement that 21st Century offered about $84 a share, a combination of 1.531 non-voting common stock shares and $32.42 in cash. In a video, Time Warner Chair and CEO Jeff Bewkes said the board determined that the unsolicited bid “was not in the best interests of Time Warner.” 21st Century Fox also confirmed its bid.

Shares of Time Warner soared 17 percent to $83.13 in morning trading Wednesday following an initial report by The New York Times that Murdoch offered the bid for the New York-based company that owns HBO, Turner Broadcasting System and Warner Bros. “The Time Warner Board of Directors declined to pursue our proposal,” said 21st Century in a statement. We are not currently in any discussions with Time Warner.” Rarely do deals of this magnitude fail after the first offer, and the two companies will continue to negotiate given Murdoch’s heavy interest in adding more film and TV assets. But knowing Time Warner has at least one suitor, other network operators could be interested in jumping in to buy all or parts of the media giant. With content production cost surging, TV networks are looking for acquisition deals to boost their bargaining leverage against cable and satellite companies and sports leagues that are seeking higher payments.

T = Technicals on the Stock Chart Are Strong

Time Warner stock has been moving higher over the past couple of years. The stock is currently trading near all time highs and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Time Warner is trading above its rising key averages which signal neutral to bullish price action in the near-term.

TWX

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Time Warner options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Time Warner options

30.15%

96%

94%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Time Warner’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Time Warner look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

79.75%

-7.63%

50%

92.86%

Revenue Growth (Y-O-Y)

8.73%

4.91%

0.2%

10.25%

Earnings Reaction

2.65%

1.1%

-0.79%

-0.37%

Time Warner has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Time Warner’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Time Warner stock done relative to its peers, News Corp. (NASDAQ:NWS), Walt Disney (NYSE:DIS), Comcast (NASDAQ:CMCSA), and sector?

Time Warner

News Corp.

Walt Disney

Comcast

Sector

Year-to-Date Return

1.85%

-0.95%

12.75%

5.62%

5.81%

Time Warner has been an average performer, year-to-date.

Conclusion

Time Warner provides media and entertainment through a variety of mediums to consumers and businesses all around the world. The stock has been moving higher and is currently trading near all time highs. Earnings and revenue figures have been increasing over the last four quarters, which has left investors happy. Relative to its strong peers and sector, Time Warner has been an average year-to-date performer. Look for Time Warner to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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