Meet the Company Behind the Batman

Worldwide Invest Better Day 9/25/2012

As Worldwide Invest Better Day approaches, we here at The Motley Fool are profiling dozens of companies that might be worth investing in. Here's a closer look at Time Warner (NYSE: TWX  ) , whose varying properties include the rights to the Dark Knight himself: Batman.

History and overview
Like its closest peer, Walt Disney (NYSE: DIS  ) , which you can learn more about here, Time Warner is a conglomerate whose interests include magazines (e.g., TIME, Sports Illustrated, People), cable and TV networks (e.g., The CW, Turner Broadcasting, HBO, The Cartoon Network), comic books (DC Comics), and filmmaking (Warner Bros. Studios, New Line Cinema).

AOL (NYSE: AOL  ) and Time Warner Cable (NYSE: TWC  ) were also part of the business at one point. Each was spun off as a distinct public entity in 2009, leaving the core business to concentrate on content development and distribution. Back to the beginning, you might say.

Warner Bros., the company's film and TV studio division, traces back to when brothers Albert, Harry, Sam, and Jack opened their first movie theater in 1903 in New Castle, Pa. Fifteen years later, the brothers would open Warner Studios on Hollywood's Sunset Boulevard.

Warner Bros. has produced and distributed hundreds of megahits in the 95 years since. You probably know many of the names: Million Dollar Baby, The Green Mile, The Departed, Superman: The Movie, The Fugitive, and The Matrix, among others.

More recently, Christopher Nolan's reimagining of Batman has twice topped $1 billion in worldwide box office receipts. The Harry Potter series also brought in riches. In all, Warner has led studios in box office revenue in five of the last 10 years.

The business
Movies may be what Warner is known for, but networks are the biggest contributor to overall revenue. The company makes money two ways when it comes to TV. First, it owns networks such as HBO and The CW. And second, via Warner Studios, the company produces shows that are then distributed through other channels.

The Big Bang Theory fits this model. Warner distributes the hit show about a group of comic-book-loving physicists, which airs Thursday nights on CBS (NYSE: CBS  ) . Season six kicks off on Sept. 27. Other shows in Warner's lineup include Two and a Half Men and the action drama Person of Interest.

Finally, there's the publishing division, while includes magazines produced by the Time division but also DC Comics, which, again, is best known as home to iconic heroes Batman and Superman. The company has done well producing TV and films based on the duo, but none of its thousands of other superhero properties. Warner aims to fix that, and in 2009 formed a new division called DC Entertainment to bring more of its superheroes to TV and film.

So far, the division's efforts -- which include last year's flop Green Lantern -- haven't produced much in the way of results. Expect Warner to keep trying. Big-ticket TV and movie franchises account for far too much revenue to give up:

Segments

2011*

2010*

2009*

Networks $13,654 $12,480 $11,253
Film and TV entertainment $12,638 $11,622 $11,066
Publishing $3,677 $3,675 $3,736
Corporate ($995) ($889) ($667)

Source: S&P Capital IQ. *In millions.

Despite DC's failure to transition, the overall business has been improving for a few years now. Revenue growth is accelerating while cost controls have helped to boost net margins:

Metrics

FY 2011

FY 2010

FY 2009

Revenue Growth 7.8% 5.9% (4%)
Gross Margin 44% 44.4% 44.7%
Net Margin 9.9% 9.5% 8%
Cash / Debt $3,476 / $19,524* $3,663 / $16,549* $3,417 / $16,208*

Source: S&P Capital IQ. *In millions.

And that's not all. As a business, Time Warner tends to produce at least $10 billion in excess cash flow each year, which makes its debt load manageable and dividend payments sustainable. (Shares of Time Warner yield 2.30% as of this writing.) Here are three other things you, as a potential investor, should take away from this data:

  1. Accelerating revenue growth suggests that Warner is making smart bets with the content it has.
  2. While gross margin has declined modestly, management has kept a lid on operating costs and in the process delivered higher profits. That's important; higher profit means more cash flow and more cash means more capital for investing in future growth and paying dividends.
  3. Rising debt levels would be worrisome if not for Warner's growth. Keep an eye on debt. At some point, investors will want to see management paying down or refinancing obligations.

The Foolish takeaway
Think about how you invest your own resources. Do you buy what you need at a good price? Do you invest the excess in things that matter, whether for the benefit of yourself, your family, or a cause you care about? Are you careful not to pile up debts you can't pay off? Companies and management teams are subject to these very same tests. Time Warner's team appears to be delivering.

Care to learn more? There's plenty of source material freely available on the Web:

Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team and the Motley Fool Supernova Odyssey I mission. He owned shares of Time Warner and Walt Disney at the time of publication. Check out Tim's web home, portfolio holdings, and Foolish writings, or connect with him on Google+ or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool owns shares of Walt Disney. Motley Fool newsletter services have recommended buying shares of Walt Disney. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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