Time Warner (NYSE:TWX) has faced some pressure recently on its revenue growth due to certain international business closures, the effect of Olympics, weak CNN ratings and a decline in publishing revenues. However, we note that the company’s cable networks are performing fundamentally well and more emphasis on original programming and expansion of HBO will drive future growth. Even though this year has been a dull one as far as the revenue growth is concerned, margins have still improved due to higher ad pricing, an increase in subscription fees and growth in digital video licensing revenues.
The weakness in publishing is not a big concern given that this business constitutes roughly just 5% to our estimated value for Time Warner. Apart from publishing and CNN, other factors leading to the weakness are temporary. CNN is something that Time Warner still needs to work on. Even though the channel still remains a top destination for breaking news, it needs to improve on the rest of its programming.
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Focus On Programming
Unlike other media companies such as News Corp (NASDAQ:NWS) and Disney (NYSE:DIS), Time Warner is more dependent on its cable networks business relatively. This business provides stable growth due to annual increments in fee per subscriber and a more or less stable subscriber base. However, in order to ensure that this growth continues, Time Warner will need to continuously demonstrate that its cable networks have good demand. For this, there is no better alternative than good original programming along with high quality syndicated shows.
So far in 2012, TBS has been the top performing cable network among 18-34 demographic and has been on number 2 position in 18-49 demographic.  The prime time ratings have seen significant growth, thanks to the success of syndicated series such as The Big Bang Theory and a general improvement in demand for comedy. In addition, the network is going to launch some new originals and also announced new contract with Major League Baseball extending its rights through 2021.  TNT is also performing well with its shows such as Major Crimes, Perception and Dallas. ((Time Warner’s Q3 2012 SEC filings)) We estimate that TNT and TBS constitute roughly 25% to Time Warner’s value just from their U.S. operations alone.
As far as HBO is concerned, the network is doing quite well with its quality programming and subscriber growth. The shows such as Game of Thrones and True Blood are averaging 12 million viewers per episode and the network has seen 30% growth in its subscriber base internationally in Q3 2012. We estimate that HBO contributes more than 20% to Time Warner’s value from its U.S. business alone. If we account for its international operations as well, HBO is by far the most critical business that Time Warner owns.
In addition to the above, Warner Bros. Television Group (WBTG) has been doing well and has 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.  WBTG has also produced 2 shows for NBC, partially responsible for NBC’s fantastic performance in the new TV season.
Our price estimate for Time Warner stands at $58, implying a premium of about 25-30% to the market price.Notes: