Time Warner Stock Has A Strong Growth Potential In 2016

  • Time Warner reported mixed results for Q4 2015 that triggered a decline in its stock price.
  • Increasing programming costs in Turner, technology and marketing costs in HBO, and disappointing revenue from Warner Brothers’ films drove a disappointing top line figure.
  • Time Warner increased its 2016 guidance above consensus, boosted dividends, and launched a new buyback program.
  • Even though Time Warner stock is down with the rest of media companies' stocks, it has strong growth potential in 2016.

The media and entertainment giant Time Warner (NYSE:TWX) reported its fourth quarter and full year 2015 results on 10th Feb, which triggered a 5% drop in its stock price next day. On the top line, the company missed analysts’ estimations by $450M, with only $7.08B in earnings, which reflects a 6% decrease YoY for the fourth quarter, mainly due to lower Warner Brothers film revenues. On the bottom line, Time Warner reported slightly higher figures than the market consensus, with a $1.06 EPS, which is $0.05 or 8% higher than its Q4 2015 EPS.

Beyond the disappointing results for Warner Brothers films, the company also presented a slower increase in the number of HBO Now subscribers, achieving only 800K as opposed to the estimated 1M subscribers. HBO Now is an online video streaming service that was launched in April 2015 as Time Warner’s response to Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) Prime, and Hulu services. Time Warner tried to increase the monetization of HBO's success while fighting back the leading streaming services and high market expectations. However, slower adoption than expected and higher technology costs prevented HBO Now from driving a significant change in HBO financials and have hardly impacted Time Warner’s financials.

Diving deeper into the details, the adjusted operating income margin declined significantly in every segment as shown in the chart below. The sharp drop in adj. operating income margin unveils fundamental problems in each segment of the business. In the Turner segment, revenues increased by only 2% while costs increased substantially, mainly due to a 22% increase in programming costs, driving a six-percentage-point drop in adj. operating income margins, down to 29%.

TWX_chart 2_021116

In the HBO segment, revenues increased by 6% YoY, mainly due to an increase in subscription revenues. Marketing and technology costs related to HBO Now are offsetting the entire increase, as mentioned above, driving the adj. OI margin down to one percentage point. In the Warner Brothers segment, the adj. OI margin was hardly changed when it suffered from increased costs for restructuring and theatrical valuation adjustments while revenues dropped in 13% YoY due to disappointing Warner Brother’s film figures.

In an earlier article that was published before the Time Warner earnings, I mentioned that the spin-offs and merger rumors will attract attention from the market. CEO Jeff Bewkes indirectly touched on that subject, saying, “The combined scale of our businesses is critical to our ability to take advantage of that growth, and it's particularly important in distribution and programming, the core of what we do as a company.” Bewkes implied that Time Warner will not spinoff HBO anytime soon. However, the opportunity of a merger or buyout were not discussed nor implied during the conference call.

Time Warner reported its mixed Q4 results in the middle of a wide decline in media companies stock prices that include Walt Disney (NYSE:DIS), Viacom (NASDAQ:VIA), and Comcast -A (NASDAQ:CMCSA), when all are facing business difficulties. The broad market, together with the media stocks weakness, has impacted Time Warner stock price more than the mediocre results that the company presented. Yes, Time Warner has problems, but the company has increased its 2016 guidance, launched a new $5B share repurchase program, and boosted dividend payments. In the long run, I believe Time Warner is on the right track to keep growing the business by implementing its strategic change in rights licensing (elaborated in the earlier article), expanding HBO Now, and releasing new franchise movies from Lego, DC, and Harry Potter.

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Comments on this article and TWX stock

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ray.saudlach
bearish
Every data point you show (slow subscriber growth for HBO Now, drop in operating income) would make Time Warner not be a buy.

Besides the repurchase and dividend, what justification do you have Time Warner will outperform it's peers?
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