Time Warner Price Estimate Revised To $80 Given The Split From Time Inc.

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Time Warner

Time Warner (NYSE:TWX) completed the separation of its publishing business, Time Inc., at the end of the second quarter this year and we have updated our model to reflect the impact of the split. We have estimated the revenues for the first two quarters of 2014 to be around $1.5 billion and have forecast zero income from this business in the coming years. We will be completely removing this segment from our model after Time Warner releases the annual filings for 2014 with details of balance sheet items and the cash flows. We have revised our price estimate from $83 to $79 for Time Warner.

Time Warner has been shrinking dramatically over the past decade with the exit of Warner Music, AOL, Time Warner Cable (NYSE:TWC) and now Time Inc. We believe that the split of publishing business is a step in the right direction, as this will allow Time Warner to focus purely on media content and keep itself away from the troubled print media industry. The company’s decision to exit publishing was partly driven by the challenges faced by the publishing industry, which is seeing continuous declines in advertising as well as subscription revenues given the growth in digital media.

Time Inc. generated revenues of $3.34 billion in 2013. The estimated EBITDA margin of 18% for publishing segment translates into EBITDA of $607 million, representing 7% of Time Warner’s overall EBITDA for 2013. The publishing business contributed close to 3% to Time Warner’s value before the split, according to our estimates.

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See our complete analysis for Time Warner

How Is The Publishing Business Trending?

Time Inc. publishes several magazines including People, Sports Illustrated, Time, InStyle and Fortune among others. In addition to publishing magazines, the company also manages several websites such as CNNMoney.com, People.com, Time.com and others. It primarily makes money via advertising and subscription fees.

Like other media houses such as News Corp (NASDAQ:NWSA), print media assets were a drain on Time Warner’s value. Time Warner’s other businesses in television and movies are growing while the publishing business wasn’t. This was the case with News Corp, which split its publishing business last year.

Time Warner’s publishing revenues declined from $4.59 billion in 2008 to $3.34 billion in 2013. [1] Free online sources have put pressure on Time’s paid products, while stagnation of print services remains a concern. For the time being, growth in digital publishing has not been able to offset the decline in print media. As Internet penetration continues to expand, users increasingly access information online. This continuing trend has put downward pressure on circulation prices. Lower readership has in turn led advertisers to spend less on print ads.

Time Inc. reported independent results for the first six months of 2014 with a net loss of $106 million as compared to a profit of $67 million in the prior year period. The revenues remained flat at $1.57 billion. [2]

We estimate revenues of about $29.23 billion for Time Warner in 2014, with EPS of $4.13, which is in line with the market consensus of $3.97-$4.40, compiled by Thomson Reuters. We currently have a $80 price estimate for Time Warner, which is more than 5% ahead of the current market price.

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Notes:
  1. Time Warner’s SEC Filings []
  2. Time Inc.’s SEC Filings []