Will The Hobbit Trilogy Send Time Warner Higher?

With shares of Time Warner (NYSE:TWX) trading around $66, 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 and premium pay and 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’s Warner Bros. has spent an estimated $561 million on the Hobbit trilogy so far, making it one of the most expensive franchises to date and nearly doubling the amount spent on the Lord of the Rings trio of films. The first Hobbit movie brought in more than $1 billion, and the second is scheduled for release this December.

T = Technicals on the Stock Chart are Strong

Time Warner stock has seen positive progress in recent years but is now trading near the top-end of a multi-year range. The stock is at highs for the year but multi-year resistance may be in sight. 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

24.24%

66%

65%

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

October Options

Flat

Average

November 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 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 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

92.86%

27.12%

57.94%

10.26%

Revenue Growth (Y-O-Y)

10.25%

-0.57%

-0.35%

-3.20%

Earnings Reaction

-0.37%

-0.50%

4.10%

4.17%

Time Warner has seen increasing earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had mixed feelings about 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:NWSA), Walt Disney (NYSE:DIS), Comcast (NASDAQ:CMCSA), and sector?

Time Warner

News Corp.

Walt Disney

Comcast

Sector

Year-to-Date Return

38.93%

0.25%

31.15%

22.16%

7.31%

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. Hobbit, the company’s most expensive franchise to date, earned close to $1 billion on its first film and is set to release the second later this year. The stock has been moving higher in recent years and is now trading near highs for the year. Over the last four quarters, earnings have been rising while revenues have been decreasing, which has produced mixed feelings among investors about recent earnings announcements. Relative to its peers and sector, Time Warner has been a year-to-date performance leader. Look for Time Warner to OUTPERFORM.

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