Last week, Time Warner (TWX: Charts, News) broadly beat analyst estimates for both earnings and revenue. The diversified media and entertainment company, which is a component of the S&P 500, reported earnings of 78 cents per share, or $822 million, a 57.5% improvement over the 46 cents per share, or $522 million, it posted the prior year quarter. Revenue increased 10.8% to $7.07 billion. Analysts on average had expected earnings of 75 cents per share on revenue of $6.97 billion. Time Warner has now beat estimates for four consecutive quarters, and revenue has increased sequentially as well. Earnings per share have increased for two straight quarters. Despite all these positive signs of growth, shares of Time Warner currently trade at a lower price than last year, due to severe macro headwinds caused by American stagnation and European chaos. However, analysts are optimistic regarding the company’s growth prospects. For the rest of the fiscal year, the average earnings consensus has increased from $2.76 to $2.78 per share.
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Along with its quarterly report, Time Warner management updated its fiscal 2011 outlook, increasing its EPS increase from the low teens to the high teens, from an adjusted EPS base of $2.41 per share, which comes in under analyst expectations. As a result, shares slid after its earnings announcement, even as the broader market staged a relief rally. CEO Jeff Bewkes attributed the company’s strong quarterly earnings to its Warner Bros. studio, which received $1.3 billion in ticket sales for Harry Potter and the Deathly Hallows: Part Two, as well as its fall lineup of hit TV shows, which currently include The Big Bang Theory, Two and a Half Men, Mike & Molly, Two Broke Girls, Suburgatory and Person of Interest, among others. “This was another terrific quarter for us, financially and strategically, putting us on pace to exceed our prior financial goals for the year,” stated Bewkes, “Our results demonstrate the success of Time Warner’s focus on investing in great content that audiences love and leading the evolution of how it’s delivered.” Bewkes is also quick to dismiss critics, who have claimed that the conclusion of the Harry Potter franchise now leaves a sizable gap in the company’s future earnings. “It wasn’t all about Harry at Warner Bros.,” Bewkes stated, Contagion’ and Horrible Bosses’ were also strong performers for the studio, as was revenue from reruns of its hit sitcom The Big Bang Theory’.
Bewkes also stressed the strength of its syndication pipeline, which funnels successful comedies, such as The Big Bang Theory’, into other cable channels, such as TNT and TBS for potential “multibillion-dollar annuities”. In addition, the Steven Spielberg-produced sci-fi series Falling Skies has scored decent ratings for TNT. These main cable channels, which also include HBO and are operated under the company’s Turner Broadcasting segment, posted mixed results for the quarter. Time Warner’s cable networks group posted a 6% increase in revenue, but the gain was offset by a 4% slide in operating income. CFO John Martin acknowledged the segment’s weakness, stating, “TBS and TNT ratings were softer than anticipated.”
Bewkes also expressed his frustration with Time Warner Cable (TWC: Charts, News), which was spun off as a separate business two years ago. Time Warner currently relies on Time Warner Cable, the nation’s second-largest cable operator, to stream its regular and premium cable channels to customers. Bewkes had been pushing Time Warner Cable management to expedite the development of a service that would allow subscribers to watch HBO on the iPads and other tablets, which he believes would revive the cable networks’ stagnant growth. Time Warner Cable management has stated that the growth potential of its premium content segment, which includes HBO, may be slowing due to macro and micro headwinds. Time Warner is also looking to sign a deal with the NFL, but has yet to cement any deals, stating that he wasn’t “interested in a loss-leader”. A potential deal with the NFL would also position the company against Disney (DIS: Charts, News), which owns sports network giant ESPN.
Time Warner has never been an exciting stock to own, but after its recent slide, value investors should check out its fundamentals. The stock currently trades at 10.5 times forward earnings with a PEG ratio of 0.89. In addition, it pays a decent 2.7% quarterly dividend.
Other News About TWX
Warner Bros. delivers for Time Warner in third quarter
Warner Bros. soundly beats the Street.
Time Warner Profit Tops On ‘Harry Potter’ Finale
Can Time Warner stay profitable without Harry?
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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.
