Time Warner: More Upside to Come

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Time Warner  (NYSE: TWX  )  has reported record quarterly revenues. The company's TV networks have been performing very well which has led to stellar free cash flow growth. The company increased its quarterly cash dividend by 10% and it is buying back $5 billion of stock. After Time Warner completes the spin-off of its publishing business, Time, the company will become more focused as a pure-media company, which will lead to additional upside.

Turner is a key earnings driver
In 2013, the company's revenue increased by 4% to $29.8 billion and free cash flow increased by 20% to $3.5 billion. Time Warner bought back 60.5 million shares using $3.7 billion in 2013. It also increased its share repurchase authorization to $5 billion, which represents almost 9% of its outstanding stock. 

Turner is a major driving force for Time Warner as it makes up 53% of the company's total operating income. TBS continues to rank as the leading ad-supported cable network in prime-time among adults. Furthermore, the news network CNN reached more viewers than any other cable news network in 2013, and it should continue to do well.

Turner's revenue increased by 5% to $10 billion and the company had an operating margin of 35% in the last year. Turner also continues to benefit from higher subscription revenue as well as advertising revenue. TBS and TNT will increase their investments in original programming by 20% in 2014, which should aid the company's revenue as well. 

HBO and Cinemax are growing
HBO has received the most Primetime Emmy awards among all of the networks for 12 consecutive years. The company's management stated that HBO and Cinemax gained almost 2 million domestic subs in 2013, the largest number of domestic subscriber additions in 17 years. Time Warner in the last quarter started disclosing the financials of HBO as a separate segment. HBO's revenue grew by 4% to $4.9 billion and the segment had an operating margin of 37% in 2013.

Owing to the very popular original programming of HBO, the segment's operating margin increased by 360 basis points in 2013. In addition, HBO consumers embraced over-the-top viewing as HBO GO saw its active users increase by 30% in 2013. As consumers are increasingly moving toward the Internet for video content, HBO's competitor Netflix  (NASDAQ: NFLX  )  has been doing well. Netflix has 44 million subs, but a fraction of HBO's total basic and premium subscriber base of 130 million across the globe.

International revenue made up 25% of total revenue for HBO in the last year, and this should grow as HBO acquired stakes from its Asian partners in 2013. HBO is also set to add a total of five new series, including True Detective, which has already surpassed 10 million viewers. Time Warner's CEO stated that HBO and Netflix are complimentary, because HBO viewing is higher in households which have Netflix, and vice versa. Clearly the threat of HBO losing out due to Internet streaming is likely exaggerated. 

Record numbers at the box office
Warner Bros. led the domestic and the international box office, and it also received 21 Oscar nominations which surpassed its peers. Warner Bros. also has more than 60 programs to be aired on TV during the 2013-2014 season. In 2013, the revenue of Warner Bros. increased 2% to $12.3 billion and operating income stood at $1.3 billion which points to an operating income margin of 11%. Warner's theatrical performance has been very good, and its video game slate has delivered stellar results as well. 

Films from Warner Bros. grossed more than $5 billion worldwide in 2013 for the first time, driven by The Hobbit: The Desolation of Smaug and Gravity. Warner Bros. is also well positioned to capitalize on the international growth of video content because 50% of its revenue comes from outside the U.S. Time Warner's management stated that other media companies are increasingly turning to Warner Bros. to acquire video content produced by Warner, so going forward this trend should aid the company's revenue and earnings growth. 

Spin-off in the second quarter
Time Warner will be spinning off Time as a separate company. The publishing unit is still very valuable as it maintains 23.7% of domestic magazine ad revenue, according to the Publishers Information Bureau. Time had total revenue of $3.4 billion and operating income of $337 million in 2013. Time Warner will likely return the cash it receives from the spin-off in the form of share buybacks, although it may also pay down debt. 

The company's publishing business will be separated in the second quarter of 2014. This will make Time Warner a full-fledged content company, which should lead to a higher valuation than those of other media and entertainment companies like Netflix, Disney, AMC Networks, etc.

Going forward
Time Warner's broad distribution outlets give the company a well-diversified revenue base which leads to steady earnings growth, as the company is buying back large amounts of its own stock.

The company's net income margin increased from 9.6% in 2010 to 12.4% in 2013, and this earnings growth trend is likely to continue. Time Warner continues to invest aggressively in developing high-quality content and adapting to technological changes as well. The company is also looking to ramp up its presence in international territories which will drive additional upside. 

Content is king
We've heard it many times before. But it's true! Those who can consistently generate high-quality content will rule their own fates. But that's only part of the $2.2 trillion battle for your living room that's raging as we speak. There are other players out there who are positioned to rise to victory when cable falters. Click here for their names. Hint: They're not Netflix, Google, and Apple.

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