Monday’s NCAA men’s basketball national championship game, in which Villanova beat North Carolina on a 3-point buzzer-beater, was a thrill for college basketball fans. It was also a landmark game, because it marked the first time the championship game was shown only on cable. Time Warner Inc.’s (NYSE: TWX) TBS network had the rights, as part of the company’s broader push to expand its sports programming through its TBS and TNT networks.
Time Warner is a diversified media giant. It holds a number of popular properties, including HBO. In an age in which Internet streaming is all the rage, investors are increasingly concerned about whether traditional television is about to go the way of the buggy whip. This has caused Time Warner stock to seesaw over the past year. The stock has recovered somewhat lately, but this is still a period of high uncertainty for the company.
Strong Properties Bolster Growth
Investors are worried about the threat to media companies posed by “cord-cutting,” as the phenomenon has come to be known. That’s when consumers, presumably tired of paying high prices for expensive cable packages, opt for over-the-top or skinnier bundle packages, where they can select individual channels.
The fear is that this will result in many consumers choosing packages that don’t include some of Time Warner’s properties. In addition to TBS, TNT and HBO, Time Warner also owns Adult Swim, truTV, Turner Classic Movies, Cartoon Network and CNN. This uncertainty was exacerbated by Time Warner’s lackluster 3% revenue growth last year, which possibly signaled a major slowdown.
But it is worth noting that Time Warner’s revenue was hit by the strengthening U.S. dollar. The company does a significant amount of business overseas, and unfavorable currency translations wiped $1.1 billion off its full-year revenue. Were it not for foreign exchange, Time Warner’s revenue growth would have been much better.
More importantly, the company continues to perform very well across its business lines.
Investors are worried about the future of television in the skinny bundle age, but Time Warner’s most important property ̶ HBO ̶ continues to be a huge success. Last year, HBO received 43 Primetime Emmy Awards – the most in a single year by any network in at least 25 years – led by a record 12 Emmys for the smash hit series “Game of Thrones.”
In addition, Time Warner also operates the highly successful Warner Bros. movie studio. It enjoyed two hits last year with “Mad Max: Fury Road” and “Creed,” which received a combined 11 Academy Award nominations.
Despite all the pessimism, Time Warner generated $3.6 billion of free cash flow in 2015. And Time Warner stock has come back to $73 in recent weeks, but it’s still well off its 52-week high of $91. This is despite the fact that management and analysts alike remain confident in the company’s results going forward.
Management expects fiscal 2016 earnings to be in the range of $5.35 to $5.40 per share. That range would result in earnings growth of 12% to 13% for the current fiscal year as compared to fiscal 2015 earnings. This view is supported by analysts as well, who also see the company growing this year. The average analyst forecast calls for 12% EPS growth in fiscal 2016.
Time Warner Stock: Attractive for Value, Income
Time Warner is a highly profitable company with several strong brands. It has a very good position in its industry, which allows it to generate solid profitability.
The stock is modestly priced; shares trade for a reasonable 16 times trailing earnings per share and 13 times forward EPS estimates. It also pays a respectable 2.2% dividend, which the company has grown by 12% per year on average over the past five years. It raised its dividend by 15% in early 2016, and also announced a new $5 billion share repurchase program, which will help boost future earnings growth even further.
Time Warner looks attractive for value and income investors, and as fears surrounding its growth prospects ease, the stock may not stay this cheap for long.
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