Time Warner (NYSE:TWX), which competes with other media giants such as Viacom (NASDAQ:VIA), Disney (NYSE:DIS) and News Corp (NASDAQ:NWS), will release its Q1 2012 earnings on May 2nd, Wednesday. Investors should watch out for the performance of company’s studio entertainment division Warner Brothers, and a couple of key cable networks such as TNT and HBO. We expect that Time Warner’s results will be affected by good TNT viewership as well as expansion of HBO and licensed content. The performance of Warner Brothers is bit of a question mark for us. Although we expect moderate revenue growth, the margins will dictate the real value add.
We estimate that Warner Brothers constitutes more than 35% to Time Warner’s value, generating profits from different channels such as box office, DVDs, content licensing and consumer products. If we look at 2011 and 2010 data, Q4 typically constitutes 30% to annual theatrical revenues. This business tends to slow down a bit sequentially in Q1 of the new year and hence the revenues for Q1 2012 might come in soft when compared to Q4 2011. However given the historical and current quarter figures from Box Office Mojo and their comparison with company reported revenues in the past, it appears that Warner Brothers’ theatrical revenues will grow in Q1 2012 when compared to Q1 of the last year.
Furthermore the viewership at TNT has been encouraging, especially among the adults. The current NBA regular season on the network has garnered highest viewership ever since it began its association with TNT. Couple this with improving demand from advertisers, we expect a healthy ad revenue growth. We estimate that TNT constitutes about 10% to Time Warner’s value.
Investors should also watch out for trends in HBO subscription given that this network alone constitutes about 20% to Time Warner’s Value. HBO has been pushing for its HBO Go app and given its premium content and integration with streaming technology, we feel that the company would have experienced subscriber growth for HBO.
Our current price estimate for Time Warner stands at $40.20, implying more than 5% premium to the market price.