Time Warner Earnings: Cable Networks Will Drive Growth But Some Questions Remain
As Time Warner (NYSE:TWX) prepares to report its Q4 2012 earnings on February 6, we expect TBS & TNT to remain strong with slight improvement in CNN’s ratings. CNN still continues to be a weak spot among Time Warner’s networks. HBO continues to expand, and with Warner Brothers expanding licensing deals and churning out quality shows, we expect stable growth for Time Warner in 2013.
The company has faced some pressure on its revenue growth recently due to certain international business closures, weak CNN ratings and a decline in publishing revenues. However, its cable networks are performing fundamentally well, and the emphasis on original programming and the 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.
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Unlike 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 provides stable growth through 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 ensure demand sustenance for its cable networks. For this, there is no better alternative than good original programming along with high quality syndicated shows.
As far as CNN is concerned, the news channel has lagged Fox and MSNBC, and has suffered a significant decline in ratings this year. However, CNN still comes out on top during major events and breaking news. We believe that hurricane Sandy will have aided the channel’s ratings, and therefore, its advertising revenues. Though longer term, we believe the company needs to find a solution by improving the rest of its programming apart from breaking news.
So far in 2012, TBS has been the top performing cable network among 18-34 demographic, and has been on number two position in 18-49 demographic. [1] 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 has also announced new contract with Major League Baseball, extending its rights through 2021. [1]
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% of Time Warner’s value just from their U.S. operations alone.
As far as HBO is concerned, the network is doing well with its quality programming and subscriber growth. The shows such as Game of Thrones and True Blood were averaging 12 million viewers per episode a few months back, and the network saw 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. We expect the international growth and quality programming will impact fourth quarter results positively.
Our price estimate for Time Warner stands at $58, implying a premium of about 20% to the market price.
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