Is Time Warner Ready to Entertain Your Portfolio?

With shares of Time Warner (NYSE:TWX) trading around $87, 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.

Chief Executive Officer Jeff Bewkes would reap more than $79 million in added payments with any change in control at Time Warner, making him a top beneficiary among shareholders who toughed out a lost decade after 2001’s ill-fated America Online merger. Joining Bewkes are investor Mario Gabelli and clients of Gamco Investors Inc., owners of a $350 million stake. In addition to benefiting from Time Warner’s return from the AOL (NYSE:AOL) mess, it has notched a 23 percent gain since a $75 billion takeover bid by Rupert Murdoch’s 21st Century Fox (NASDAQ:FOXA) became public on July 16. Bewkes, Gabelli and other employees and investors may gain further if Fox eventually wins Time Warner for more than the $85-a-share Murdoch first offered. The company has been a long-term commitment for Gabelli, who owned Warner Communications stock when Steve Ross fought Murdoch 30 years ago. “The company has been doing more or less the right things in terms of growing values, and that’s why we own 4 million shares for clients,” said Gabelli, 72, who has followed Time Warner and its predecessors for more than 40 years. Gabelli once held almost 26 million shares, according to data compiled by Bloomberg.

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 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

29.39%

86%

84%

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 = 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), Comcast (NASDAQ:CMCSA), and sector?

Time Warner

News Corp.

Walt Disney

Comcast

Sector

Year-to-Date Return

25.10%

-1.01%

12.32%

4.96%

6.42%

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 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 a year-to-date performance leader. 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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