Can Time Warner Break Higher?

With shares of Time Warner (NYSE:TWX) trading around $67, 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 recently reported financial results for its third quarter ended September 30. Chairman and CEOJeff Bewkes said: “We had another strong quarter and remain on track for another very successful year, thanks to our commitment to great storytelling across the Company. Adjusted Operating Income for the third quarter increased by 8%, while Adjusted EPS rose by 20%. The biggest driver was again our Networks segment, which grew Adjusted Operating Income by double digits and posted its highest quarterly profits ever.”

T = Technicals on the Stock Chart Are Strong

Time Warner stock has just about tripled in price since early 2009. 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.

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

20.35%

0%

0%

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

Put IV Skew

Call IV Skew

December Options

Flat

Average

January Options

Flat

Average

As of Wednesday, 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 small 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 Mixed 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

50%

92.86%

27.12%

57.94%

Revenue Growth (Y-O-Y)

0.2%

10.25%

-0.57%

-0.35%

Earnings Reaction

-0.32%*

-0.37%

-0.5%

4.1%

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

*As of this writing.

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

Time Warner

News Corp

Walt Disney

Comcast

Sector

Year-to-Date Return

14.31%

14.62%

13.15%

15.5%

15.39%

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 company reported strong financial results that left investors pleased. The stock has tripled its prices in the last four years is currently trading near all-time highs. Earnings have been increasing while revenue figures have been mixed over the last four quarters, which has kept 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.

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