Is Time Warner Running Out of Time?

With shares of Time Warner Inc. (NYSE:TWX) trading at around $59.75, 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:

C = Catalyst for the Stock’s Movement

Time Warner is part of a recent trend that is cause for concern, which is a decline in revenue. However, on an annual basis, Time Warner’s revenue decline was small compared to many other companies throughout the broader market. Annual revenue went from $28.97 billion in 2011 to $28.73 billion in 2012.

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The decline in revenue had a lot to do with consistent subscriber losses, which, in turn, was partially due to Time Warner being late to the digital party. Time Warner has also suffered a decline in market share in the pay-tv market. Its market share has declined from 13.4 percent in 2007 to 11.7 percent in 2012.

The one constant negative for Time Warner is poor customer service. It has become obvious that Time Warner takes the route of hiring under-qualified employees that won’t cost much. This poor customer service has led to many subscriber departures.

Now that the negatives are out of the way, let’s look at the other side of the picture. Positives for Time Warner include:

  • Increased cash flow
  • Shedding non-core assets and focusing on expanding core operations
  • Plans to expand internationally
  • Vast majority of analysts are bullish on the stock
  • 1.90 percent dividend yield
  • Consistent EPS improvements on an annual basis
  • Stock buybacks
  • Increasing digital presence
  • Increasing number of platform options for content distribution
  • Exiting magazine business

In regards to the potential threat of Google Inc.’s (NASDAQ:GOOG) Google Fiber, Time Warner feels as though there’s no demand for the gigabit Internet, and that until there is, they’re not going to worry about it. Time Warner CFO Irene Esteves specifically stated, “We’re in the business of delivering what consumers want, and to stay a little ahead of what we think they will want. We just don’t see the need of delivering that to consumers. We’re already delivering 1 gigabit, 10 gigabit-per-second to our business customers, so we certainly have the capability of doing it. If Google finds the magic pill and finds applications that require that and develops a need for it, well terrific. We would build our product base in order to deliver that.”

Now let’s take a look at some comparative numbers. The chart below compares fundamentals for Time Warner, Dish Network Corp. (NASDAQ:DISH) and DIRECTV (NASDAQ:DTV). Time Warner has a market cap of $55.60 billion, Dish Network has a market cap of $17.67 billion, and DIRECTV has a market cap of $31.62 billion.         

TWX

DISH

DTV

Trailing   P/E

19.25

27.66

12.05

Forward   P/E

14.00

16.39

9.51

Profit   Margin

10.51%

4.46%

9.92%

ROE

10.08%

N/A

N/A

Operating   Cash Flow

$3.44 Billion

$2.01 Billion

 $5.63 Billion

Dividend   Yield

1.90%

N/A

N/A

Short   Position

2.20%

1.30%

2.60%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal        

The debt-to-equity ratio for Time Warner is slightly above the industry average of 0.50. It’s not cause for concern. Time Warner has managed debt relatively well.

Debt-To-Equity

Cash

Long-Term Debt

TWX

0.67

$2.84 Billion

$19.87 Billion

DISH

165.97

$7.24 Billion

$11.89 Billion

DTV

0.90

$1.90 Billion

$17.53 Billion

 

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T = Technicals Are Strong       

Time Warner has been the top performer in this group year-to-date. It’s also the only company of the three that pays a dividend.

1 Month

Year-To-Date

1 Year

3 Year

TWX

6.01%

25.62%

67.38%

95.38%

DISH

6.91%

7.14%

26.64%

99.29%

DTV

-0.27%

10.01%

14.65%

52.85%

 

At $59.75, Time Warner is trading above all its averages.

50-Day   SMA

53.83

100-Day   SMA

52.15

200-Day   SMA

47.39

 

E = Earnings Have Been Strong                            

Earnings have consistently improved on an annual basis, but earnings can easily be manipulated. Revenue, on the other hand, is very difficult to manipulate. Though 2012 only saw a small setback in regards to revenue, it’s still a negative. It shows that Time Warner isn’t as resilient to weakening economic conditions as some other companies. Being behind the technological curve has also played a role.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

26.43

25.39

26.89

28.97

28.73

Diluted   EPS ($)

-11.22

2.07

2.25

2.71

3.09

 

When we look at the previous quarter on a year-over-year basis, we see a slight decline in revenue and a significant improvement in earnings. Once again, there is a decline in revenue. However, on a sequential basis, we see significant improvements in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

8.19

6.98

6.74

6.84

8.16

Diluted   EPS ($)

0.75

0.59

0.44

0.86

1.20

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

The industry isn’t in danger. It’s simply a matter of there being a lot of players. DISH Network and DIRECTV aren’t making life easy for Time Warner in regards to subscribers. Time Warner is the largest company of the three, but it’s not the best situated based on current economic circumstances.

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Conclusion

Time Warner isn’t running out of time in a literal sense, but of three aforementioned companies, only DIRECTV has shown consistent revenue and earnings improvements without any hiccups over the past several years. DIRECTV doesn’t offer and yield, but it should hold up best in a difficult environment thanks to its Latin America growth potential.

As far as Time Warner is concerned, it’s not a bad option, but there are better options available at the current time. Time Warner is a WAIT AND SEE.

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Disclosure: All content posted represents my opinion and views and should never be considered professional advice. You should do your own research and consult with a professional financial advisor before making any investment decisions. I do not have a position in this stock. I am currently short technology, financials, the Russell 2000, and the euro.