Time Warner Inc. (TWX) Analysis From: Sean Maloney Re: Stock Analysis Date: April 15, 2011 Time Warner Incorporated (TWX) is a worldwide leader in entertainment and media with business in publishing, filmed entertainment, and television networks. They are the world’s third largest media conglomerate behind Walt Disney and News Corporation. In the world of publishing, Time Inc. is a top publisher of titles including DC Comics, People, Time, and Fortune. One of the company’s subsidiaries, Warner Bros. Entertainment, includes the film studios of Warner Bros. Pictures and New Line Cinema, as well as television production unit Warner Bros. Television Group. Through Turner Broadcasting, another of Time Warner’s subsidiaries, the company runs a portfolio of television networks including HBO, TBS, TNT, and CNN. The corporation employs over 32,000 individuals and is headquartered in New York City, but has offices worldwide. The main points I would like to address while analyzing this stock are as follows: analysis of competitors and the S&P 500, the general price trend, the Profitability and Market Value Ratios, the Balance Sheet, the Dividends paid to shareholders, recent headlines, 2013-15 projections, the Simple Moving Average, risk, and finally, my decision on whether this stock is outperforming, underperforming, or neutral. Let me begin by stating that I am advising to buy this stock and hold it for three to five years, for reasons I will address in the following paragraphs. While some consider Time Warner a media giant, which it arguably is, the company is still third in total profitability and growth behind number one Walt Disney and number two News Corporation. However, it is interesting to note that the Earnings per Share for the last two years of Time Warner (2.60 and 2.25 respectively) has been higher than both Walt Disney (2.40 and 2.07 respectively) and News Corporation (1.10 and 0.95 respectively). Also, the projected gains of Time Warner (+165% and +85%) for 2013-15 are much higher than Walt Disney (+75% and +50%) and News Corporation (+75% and +15%). The following details some key aspects of Time Warner and its main competitors. As you can see in Figure 1, the Figure 1: TWX vs. Competitors Market Cap of Time Warner Direct Competitor Comparison is significantly less than News TWX NWS DIS Industry Market Cap: 38.95B 48.04B 79.19B 544.99M Corporation and Walt Disney. Revenue (ttm): 26.89B 33.08B 39.04B 591.76M Both the Revenue and the Net Income of Time Warner is Gross Margin (ttm): 44.42% 36.13% 18.58% 5.55% also less, confirming that the Net Income (ttm): 2.56B 3.13B 4.42B N/A size of Time Warner is much EPS (ttm): 2.25 0.95 2.07 N/A smaller than that of News P/E (ttm): 15.84 15.26 18.40 16.90 Corporation and Disney. PEG (5 yr expected): 0.90 N/A 1.16 1.07 1
Nevertheless, the PEG Ratio of Time Warner is less than one, which means that the earnings of Time Warner are growing faster than investors are willing to pay for those earnings. This suggests that the stock is currently priced at a bargain. The General Price Trend for Time Warner can also be assessed. In December of 1999, Time Warner hit an all-time high when the price of its stock reached $227.61 a share. Since then, the stock has steadily declined, only to have a slight recent rebound in January of 2007, with a price of $65.61 per share. Currently, Time Warner’s stock stands at $32.31, losing about 70 percent of its value from 1999. The 1999 spike in price can be directly related to Time Warner’s acquisition of Turner Broadcasting System in October of 1996 and the upcoming merger of America Online (AOL) in January of 2000. This “bubble” is the direct result of investors getting too excited about a merger much too quickly. Figure 2 shows Time Warner’s performance (blue) in the last two years when compared to the S&P 500 (red). As you can Figure 2: TWX vs. S&P 500 see, Time Warner has frequently outperformed the S&P 500 in the past two years and is currently beating the index by about 6%. The same is true for the Dow Jones Industrial Average. Where Time Warner is losing the indices battle is when compared to the NASDAQ Composite. This index is up about 8% when matched up to Time Warner. Profitability and Market Ratios should also be addressed. The current Net Profit Margin for Time Warner is 9.1%, down 0.5% from 2010. The current Operating Profit Margin, however, is 34.0%, up 1.5% from 2010. The current Return on Shareholder Equity is 7.5%, down 0.3% from 2010. Both the Price Earnings Ratio and the Relative Price Earnings Ratio are down from 2010, from 13.7 to 13.5, and from 0.86 to 0.80, respectively. However, things look bright for the futures of these two ratios, as a 22.0 P/E Ratio and a 1.45 Relative P/E Ratio have been predicted for 2013-15. Next, we can look at Time Warner’s Balance Sheet. Currently, TWX has $16,549 million in debt. This is larger than News Corporation’s debt which stands at $13,172 million, but substantially less than Walt Disney’s debt which is currently $12.480 billion. The good news for investors is that most of this debt ($16,523 million) is long-term. Only $5,325 million is due in the next five years, a good sign when investing for three to five years. Total Current Liabilities amount to $8,643 million and while the company does not issue Preferred Stock, $16 million comes from Common Stock. Time Warner has $13,138 million in Current Assets, and $3,663 million and $1,920 million in Cash & Cash Equivalents and Inventory, respectively. This implies that a large portion of Time Warner’s assets are liquid. The company has no money in Short-Term Investments, but currently has $1,796 million in Long-Term Investments. The Total Assets currently stand at $66,524 million.
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One concern for the future of Time Warner is the use of its dividends. While the company currently has a moderately impressive Dividend Yield at 2.9%, the expected Dividend Yield for 2013-15 will be a mere 1.5%, nearly half of what it is today. In 2010, a company record $971 million was spent on Dividends Paid, more than both Walt Disney ($653 million) and News Corporation ($418 million). The problem, however, lies in the dividend’s future. Not only is the Dividend Yield expected to drop significantly, but the All Dividends to Net Profit Ratio is expected to fall 8% by 2013-15 to 30%. Even though Time Warner has been increasing its dividend each year for the past seven years, the fact remains that it has only been issuing dividends for that period of time. The 10-10 Rule would have us wait for three more years to see if the dividend would indeed fall below its current 2.9% yield. However, I am advising to invest in this stock for three to five years, not for the distant future. We can also look at recent headlines to get a sense of investor’s faith in the company. Time Warner did close out 2010 successfully, advancing its top-line by 4% and its bottom-line by 29% for the full year. Most of these totals were brought on by success in their television networks and film entertainment divisions. Also at the end of 2010, Time Warner’s board of directors increased its share-repurchase authorization to $5 billion. The company also raised its quarterly dividend payout 11%. Time Warner saw better-than-expected 2010 fourth quarter results with an increase of advertising and subscription revenues. Time Warner’s Networks Division jumped 14% and Filmed Entertainment grew by 10%. In the film business, Time Warner’s Warner Bros. has found substantial achievement recently. Four of the top ten grossing films in Warner Bros. history have come out in the past five years, all of which have been summer blockbusters. This summer, Warner Bros. plans to release the Green Lantern, and the conclusion to the Harry Potter films, Harry Potter and the Deathly Hallows, Part 2. Both should be successful, but the latter is a surefire hit for movie goers. This will undoubtedly raise Time Warner’s stock value. Recently, however, legal issues involving Time Warner have come up involving copyrights, fees, and revenue distribution rights for mobile devices. In particular, Time Warner is running into legal issues with streaming cable television shows on the iPad. This issue is affecting others in the entertainment industry as well, including Walt Disney and News Corp, but it will be important to keep an eye on this situation as it develops. Figure 3 shows the projected values of Time Warner for 2013-15. Currently, Time Warner sells for $32.31. As you can see, the High projection is a price of $85, creating a 165% gain and giving an Annual Total Return of 19%. Figure 3: TWX 2013-15 Projections The Low projection is a price of $60, producing Time Warner 2013-15 Projections a gain of 85% and an Annual Total Return of Price Gain Ann’l Total Return 19%. Even with its lowest prediction, Time High 85 (+165%) 29% Warner produces an 85% gain from its current price in the next 2-4 years. This is quite an Low 60 (+85%) 19% impressive Figure 4: TWX vs. VL Arith. Index projection and one that could be a deal maker for this Percent Total Return 1/11 stock. Figure 4 also shows some projected figures. This TWX VL Arith. Index table displays a percentage of the total returns of Time 1 yr. 17.9% 31.8% Warner compared to a Value Line Arithmetic Index in a 2 yr. 116.3% 35.8% one, two, and five year period. What this table finds is an 5 yr. 98.3% 41.8% 3
average return that is significantly higher than the Value Line Index in the two and five year periods. Again, this table shows some significant improvements in Time Warner stock in the next 2-5 years. Another tool to use while analyzing this stock is the Simple Moving Average. Figure 5 shows the 200 day average (red) as well as the 50 day average (green) in the past three months compared to the Time Warner stock Figure 5: Simple Moving Average of TWX (blue). This gives the perspective of the long and intermediate moving averages. As we can see from the chart, Time Warner is well above the 200 day moving average, making it a great stock to invest in for the future. However, we are currently seeing this stock in a warning phase which means that it is below the 50 day moving average of 36.24. If this pattern continues, the stock’s recent uptrend may be in danger. Conversely, this could mean that it is the right time to get into the stock, since the price will be slightly lower in the upcoming days. Since we should invest in this stock for the future (3-5 years), we can devote less concern to the 50 day average, even though the stock has recently dipped below this mark. Finally, I would like to briefly address the risk of this stock. While stocks in the entertainment industry are often quoted as having more risk and being more volatile than others, Time Warner currently has a risk safety rating of two, which means it has little risk. The beta of the stock is 1.28, slightly higher (0.28) than the market. However, you will make up this difference with the rewards of 85-165% predicted gains. Also, Time Warner stands strong financially, with a B++ rating. Overall, this stock is a great buy for the length of three to five years. The company has had recent improved financial flexibility, enhanced growth prospects, and has excellent brand recognition. Furthermore, Time Warner trades for less than most of its competitors, including Walt Disney, even though it is expected to outperform these competitors in terms of earnings growth. The company has a very attractive PEG Ratio at 0.90 for the next five years, and currently has an attractive Dividend Yield of 2.70%. As stated above, the stock is currently priced at a bargain rate, and is expected to grow somewhere in the vicinity of 85-165% in the next four years. The stock consistently outperforms the S&P 500 and has strong future Price Earnings predictions. The company also has a small amount of debt that is due in the next five years, the period in which I am advising to invest. Also look for Time Warner to increase its value this summer, with the release of two potential blockbuster movies. The stock is also consistently above the 200 day Simple Moving Average, which is important when analyzing its long-term growth. This bargain stock will soon outperform its current price. With such potential gains, I have no choice but to recommend buying Time Warner stock and holding it for a period of three to five years. 4