Is Time Warner Enticing After Recent Headlines?

With shares of Time Warner (NYSE:TWX) trading around $69, 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.

Time Warner is reported to be in talks to purchase a large stake that’s worth as much as $1 billion in the media empire Vice Media. Once a publication that was aimed at just hipsters, Vice has grown into a huge media conglomerate. It now includes a record label, ad agency, and a show on HBO. The magazine by itself now accounts for fewer than 5 percentof the revenue of the company, which for the most part is dependent upon content that is sponsored on its three channels online. Vice has received attention for a provocative mix of stunt journalism and content such as sending Dennis Rodman, the former star basketball player, to North Korea. The brand has become hugely popular with kids today and with companies that are hungry for the younger consumer, as Time Warner is. The possible stake by Time Warner is expected to put a value on Vice of more than $2.2 billion, which is 50 percent more than its value last year, when a piece was purchased by Rupert Murdoch.

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 poised to continue. 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 signals neutral to bullish price action in the near-term.

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

20.03%

50%

48%

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

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

As of Tuesday, 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 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 happy with Time Warner’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

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

Time Warner

News Corp

Walt Disney

Comcast

Sector

Year-to-Date Return

3.42%

-3.87%

11.01%

1.74%

4.07%

Time Warner has been a relative performance leader, year-to-date.

Conclusion

Time Warner provides media and entertainment through a variety of mediums to consumers and businesses all around the world. The company is reported to be in talks to purchase a large stake that’s worth as much as $1 billion in the media empire Vice Media. 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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