Will 2013 Be a Blockbuster Year for Time Warner?

Time Warner Inc.’s (NYSE:TWX) stock has surged around 23 percent since the beginning of the year. The media giant, which owns Warner Bros, HBO, and CNN, has predicted double-digit growth for the coming year. With its current media holdings and the recent divestiture of its namesake magazine division, can its stock price climb higher? Let’s use our CHEAT SHEET investing framework to decide whether Time Warner is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock’s Movement

Time Warner’s first quarter results were met with mixed reviews from analysts and investors. While the company beat earnings estimates, quarterly revenues decreased by 0.6 percent from the previous year’s quarter. The compressed revenue figures were mostly due to lackluster performance at the box office from its film entertainment division and lower ad revenue from some NCAA basketball tournament games airing in the fourth quarter of 2012, compared to the previous quarter.

Time Warner enjoyed continued success with its TV entertainment and networks division. HBO shows like Game of Thrones remain fan favorites and are benefitting from growing international viewership as well as new monetization opportunities via streaming video services. Revenues from Warner Brothers should grow this quarter as Time Warner picks up profits from recently released box office hits including The Great Gatsby and Man of Steel. Additionally, the recent spinoff of long struggling Time Inc. will allow Time Warner to focus on growing its TV and film divisions.

E = Earnings Are Increasing Year-over-Year

Time Warner’s earnings per share have increased over the last three quarters. The most recent quarterly number of $0.75 showed a significant increase from the previous year’s quarterly earnings of $0.59. While the earnings growth paints a pretty picture for investors, revenue growth has been sluggish. Time Warner attributes the 0.6 percent year-over-year decline in quarterly revenues of $6.94 billion to lagging growth in its film and TV entertainment division, despite a 4 percent revenue increase in its TV networks division. CEO Jeff Bewkes believes that the divestiture of its namesake unit, Time magazine, will free up more resources to focus on growing its film and TV entertainment division.

2013 Q1 2012 Q4 2012 Q3 2012 Q2 2012 Q1
Qtrly. EPS $0.75 $1.21 $0.86 $0.44 $0.59
EPS Growth YoY 27.12% 57.94% 10.26% -25.42% 0.00%
Revenue Growth YoY -0.57% -0.35% -3.20% -4.07% -4.43%

E = Excellent Relative Performance to Peers

While chief competitors, Discovery Communications (NASDAQ:DISCA) and CBS (NYSE:CBS), shouldn’t be underestimated, Time Warner offers the most value, especially to the dividend investor. Time Warner has increased its dividend steadily throughout the last several years, even increasing its dividend during the financial crisis. It now yields a best-in-class 1.90 percent and—with a payout ratio of 33 percent—the company has room for future increases. If you want high growth you should be looking at Discovery—with a projected growth estimate of 33.50 percent in the next year and the healthiest operating margin at 40.81 percent—but you will have to pay for it at a price to equity multiple of 32.55 versus Time Warner’s multiple of 18.74.

TWX DISC CBS
Trailing P/E 18.74 32.55 20.13
Growth Est. (2013) 12.20% 33.50% 19.20%
Dividend Yield 1.90% N/A 1.00%
Operating Margin 22.77% 40.81% 21.80%

T = Technicals on the Stock Chart are Strong

Time Warner is currently trading at around $60.97, well above its 200-day moving average of $55.89 and its 50-day moving average of $58.50. The stock has experienced a strong uptrend in the past year—up 60 percent in the past 12 months. Time Warner is trading around its 52-week high of $61.73 that it achieved back in May.

Conclusion

While Time Warner is expensive relative to its historical price to earnings multiple, it is still relatively cheap compared to competitors like Discovery and CBS. There is talk of a possible merger between Time Warner and Liberty Media, which would boost the share price, but that’s just speculation at this point. Many analysts predict Time Warner will move toward the mid- to high-sixties in the near-term. Revenues should benefit from an impressive lineup of summer films. Additionally, Time Warner’s competitive advantage is relatively safe as there are high barriers-to-entry in creating profitable media content. With a healthy and growing dividend to boot, Time Warner is an OUTPERFORM.

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