Time Warner Benefits From Rising Cable Ad Prices

Time Warner (NYSE:TWX) is benefiting from rising cable advertising prices, which are pushing up the media giant’s ad revenues. We expect this happy trend to continue and have raised the Trefis price estimate for Time Warner’s stock from $26.91 to $29.51.

Time Warner operates in three primary business areas: (1) cable TV with the HBO, CNN and TNT networks; (2) film with Warner Brothers studios; and (3) magazine publishing. The cable TV business constitutes just over half the company’s share value according to our analysis.  Time Warner competes with other media conglomerates like  News Corp (NASDAQ:NWS), Disney (NYSE:DIS), Viacom (NYSE:VIA) and CBS (NYSE:CBS).

If cable advertising prices rise higher than our current forecast, Time Warner would likely experience faster revenue growth and improved profit margins. In this scenario, the stock could see an upside of 3% to 4% or even more.  Our analysis follows below.

Turner Networks broadens audience, lures advertisers

Time Warner’s cable networks have started challenging the major broadcast networks  by adding popular content like sports programming and late night shows. In one recent coup, Time Warner’s Turner Networks division signed comedian Conan O’Brien to host a new show on TBS after his dramatic departure from NBC’s Tonight Show.

By adding more broadcast-like content, Time Warner makes its cable programming more broadly appealing. This is useful to advertisers, of course, because it gives them access to a larger and more diverse audience. Consequently, Time Warner’s cable networks are able to charge higher rates for commercial time.

Higher ad prices yield fatter margins

We currently forecast relatively slow growth in ad pricing for Time Warner’s TNT and TBS networks. If the recent inflationary trend continues, however, the ad market could see the rapid pricing growth that prevailed prior to the 2009 slump. You can drag the trend-line in the chart below to create your own ad price forecast for the TNT network and see how it impacts Time Warner’s stock price.

If ad pricing returns to pre-2009 growth rates, Time Warner’s profit margins would also grow.  The next chart shows our gross margin forecast estimate for Time Warner. You can drag the trend-line to create your own estimate and see how it impacts Time Warner’s share value.

If this scenario pans out, Time Warner’s stock could see upside of 3% to 4% or more.

You can see the complete $29.51 Trefis price estimate for Time Warner’s stock here.