Strong Studio Revenue Growth Strengthens Time Warner (TWX)

Media giant Time Warner (TWX: Charts, News) impressed Wall Street this week after the company posted higher than expected fourth quarter earnings, which it attributed to higher cable and satellite fees, coupled with stronger ad revenue at its TV networks.

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Time Warner posted earnings of $1.21 per share, or $1.17 billion, an increase from the 76 cents per share, or $773 million, it reported in the prior year quarter. After adjusting for one-time benefits and charges, the company earned $1.17 per share, surpassing the FactSet analyst average forecast by 7 cents. However, revenue slid from $8.19 billion to $8.16 billion, missing the $8.22 billion analysts had forecast. Time Warner's television networks business - its largest segment - was the company's primary growth driver this quarter, posting 5% revenue growth. Popular shows such as the new "Dallas" boosted ratings at its Turner cable channels (TBS,TNT,CNN), while "Girls" and "Game of Thrones" attracted more subscribers at its subsidiary HBO. HBO also reported strong overseas subscribers, despite unfavorable currency impacts. The popularity of its shows have led to a 7% increase in revenue from distributor and subscription fees, while ad revenue grew 3%. Royalties from online streaming services, such as Netflix (NFLX: Charts, News) or Amazon (AMZN: Charts, News), also helped older shows generate additional revenue. These gains offset weakness in its movie studio and magazine businesses. However, Netflix's recent deal with Disney (DIS: Charts, News), which grants it exclusive rights to show its first run movies, could crimp profits at HBO. HBO currently distributes streaming content through its mobile platform, HBO GO. Time Warner's movie studio, Warner Bros., had weaker film releases this quarter, which couldn't match the earning power of the "Harry Potter" series, which concluded in 2011. Although "Argo" and "The Hobbit" generated strong box office returns, they couldn't measure up to the previous success of the "Harry Potter" franchise. Meanwhile, Time Warner's magazine business, its smallest business segment, fared poorly. The division, which includes the magazines Time, Sports Illustrated and People, started a round of 500 layoffs, or 8% of the division's staff, due to decreased demand of its printed editions. This will cause an estimated $60 million in charges by the end of the year. Subscription revenue at the segment was also flat. In light of its mixed quarter, Time Warner increased its dividend by 11% to 28.75 cents per share, the fourth consecutive year of double-digit dividend increases. Time Warner also announced a $4 billion stock buyback to reduce outstanding shares. Looking forward, Time Warner forecasts 2013 diluted earnings to increase in the "low double digits," due to anticipated restructuring charges at its magazine business. Time Warner forecasts earnings between $3.61 to $3.77 for the year, in line with analyst expectations for $3.66 per share. Following earnings, shares of Time Warner surged to a 52-week high north of $52 per share. The stock now trades at 12.32 times forward earnings, with a 5-year PEG ratio of 1.27. While these metrics mean that the stock is fundamentally undervalued, its debt-to-equity ratio is high, at 66.21. The company has $3.19 billion in cash, but $19.88 billion in long-term debt. Other News About TWX Time Inc.'s Magazines Fall 11 Percent at the Newsstand The iconic Time Magazine may soon be an all-digital affair. TNT and TBS Increasing Original Content to Up Licensing Fees Time Warner focuses on cable content to generate higher returns. Other Stocks in the News Einhorn Sues Apple, Wants Company to Let Go of Cash At least one major shareholder wants Apple to pay a bigger dividend. U.S. Clears Boeing 787 for Test Flights, as Delays Loom When will the Dreamliner debacle end? Copyright 2013 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. 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Published on Feb 8, 2013
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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