Time Warner Updates: Weak DVD Sales Drag on Robust Outlook
Time Warner (NYSE:TWX) recently announced that it witnessed a weak Q4 of 2011 in terms of its home entertainment business which primarily consists of DVDs and Blu-Rays. The decline in DVD sales has been a primary culprit for a weak quarter and resulted from the consumer shift to Internet streaming as well as the growth of DVD and streaming rental companies such as Netflix (NASDAQ:NFLX) and Blockbuster, now owned by Dish Network (NASDAQ:DISH). As a result of the observed trends, Time Warner recently took some steps to address the situation.
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Firstly, it decided to extend the DVD sell-through window for Warner Brothers’ movies to 56 days as compared to earlier window of 28 days, a decision that has been met by resistance from Blockbuster and Redbox. Secondly, its premium movie channel HBO has discontinued selling DVDs to Netflix at a discount. Both of these steps represent an attempt to increase DVD sales.
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We estimate that DVD sales constitute a little over 15% to Time Warner’s value, and are thus of great importance.
For 2012, Time Warner is banking on the release of some of its movies and improved ad sales across the board. Its competitor Viacom (NASDAQ:VIA) had also stated earlier last year that 2012 will witness growth in advertising sales even though economic uncertainty exists.
Our price estimate of $40.20 for Time Warner, implies a premium of little under 10% to the market price.
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