Time Warner’s Earnings Will Show A Tough Quarter But It Still Looks Undervalued

by Trefis Team
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Time Warner (NYSE:TWX) may report weak results on Nov 7 when the company announces its Q3 2012 financial performance. This will be a result of several one-time factors such as the closure of some businesses and the impact of Summer Olympics as well as more persistent factors such as weak CNN ratings. However, we believe that Time Warner will do well in the long run. The stock has risen substantially during the past few months, partially due to strong share buyback program and a strong outlook.

Our price estimate of $58 for Time Warner stands at a premium of about 30% to the market price. The advertising market shows promise and the demand for quality content continues to increase due to increasing competition between the pay-TV and alternative video service providers. This trend is positively impacting Time Warner. Apart from this, the continued demand for its premium network HBO, and the high dependence on stable cable networks business will ensure future profit growth for the company. We also expect international growth to play a big part.

See our complete analysis for Time Warner

Business Closures, Olympics & CNN Weakness Will Affect Revenues

Time Warner had few business closures this year which will continue to affect its revenue growth (year-over-year comparisons) for a few quarters including Q3 2012. The company shut down its “NDTV Imagine” in India earlier this year as the network could not garner ratings to justify its operating expenses. [1] In addition to this, the company also announced the closure of TNT network in Turkey last quarter due to similar reasons and lack of return on investment. [2] Furthermore, the presence of the Summer Olympics on NBC in Q3 affected ad dollars finding other media networks, including those owned by Time Warner. Fewer Major League Baseball games is another factor why the company will face difficult revenue comparisons to 2011. [2] While these factors are likely to dominate, there are some positive factors too supporting the advertising revenue growth for media companies.

U.S. TV advertising spend has witnessed moderate growth in 2012. This growth has stayed above the overall advertising market growth despite slight decline in TV viewership, indicating strengthening ad pricing. [3] The political ad spending will be another supporting factor for Time Warner but weak CNN ratings imply that the company may not have been able to monetize the increased political ad spending effectively. Q2 2012 represented the weakest quarter for CNN in terms of ratings in 21 years. [4] Q3 did not bring any respite and CNN registered its 20-year weekly ratings low in July and a substantial drop in ratings in August due to Olympics. [5] We’ll look for any color on the company’s efforts to revive CNN’s ratings.

Subscription & Licensing Businesses Will Do Well

Unlike some other media companies such as News Corp (NASDAQ:NWS) and Disney (NYSE:DIS), Time Warner is relatively more dependent on its cable networks business. This business is more or less stable and relatively less influenced by certain macroeconomic factors that are capable of swinging profits of some other businesses such as broadcasting, publishing, parks and resorts etc. This is due to the fact that a significant proportion of cable networks revenues comes from subscription fees. With stable or growing subscriber base and annual increments in fee per subscriber, we expect Time Warner to do well in Q3 2012 results as far as affiliate fee growth is concerned. We estimate that about 55% of Time Warner’s value can be attributed to its regular cable networks such as TNT, TBS, CNN and others. Another 20% comes from its premium network HBO’s U.S. operations.

 

Licensing revenue growth is another area where we expect Time Warner to do well, primarily due to the broader trends of growth in international licensing of shows as well as growth of the online platforms such as Netflix (NASDAQ:NFLX), Amazon Prime (NASDAQ:AMZN), Xfinity Streampix, Hulu and others. In addition to this, Warner Brothers Television Group’s track record of producing quality original shows will help the company grab more money for its licensing deals. For 2011-12 season, Warner Bros. Television Group produced some of the hit TV shows such as The Big Bang Theory, Two and a Half Men, The Vampire Diaries and Gossip Girl. For this season’s upfront market, the group has got programming orders from the broadcast networks for 16 returning series and 9 new shows. [2]

Our price estimate for Time Warner stands at $58, implying a premium of about 25% to the market price.

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Notes:
  1. Turner Broadcasting shuts Imagine TV, The Indian Express, Apr 12 2012 []
  2. Time Warner’s Q2 2012 Earnings Transcript [] [] []
  3. Data Dive: US TV Ad Spend and Influence (Update), Marketingcharts.com, Sept 14 2012 []
  4. CNN Sinks To 21-Year Primetime Ratings Low In Second Quarter, Deadline.com, June 26 2012 []
  5. August 2012 Ratings: Olympics, Slow News Month Take Toll On CNN, mediabistro.com, Aug 28 2012 []
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