Here's Why Time Warner Has More Upside

Time Warner has been involved in many battles in the media industry. Will Walt Disney and Netflix allow it to win?

May 8, 2014 at 6:06PM

Time Warner Cable (NYSE:TWX) and Walt Disney (NYSE:DIS) have staged many battles in this era of media-industry upheaval. Both companies have significant superhero entertainment divisions, thoughDisney's Marvel has had a more successful start in the war of the blockbusters. Thus, a few analysts have concerns about Time Warner. However, Time Warner's proposed merger with Comcast (NASDAQ:CMCSA), the performance of its film segment, and some of its impressive assets suggest that existing investors should keep their holdings in the company.

The Comcast deal
The merger of Time Warner and Comcast will transform the cable industry. The combined networks of both companies would surpass 84 million households, and would give birth to a cable giant with massive negotiating power with networks over licensing fees. In other words, Time Warner will become part of a juggernaut in the industry. Apart from dwarfing its rivals, it will be able to beat back fresh challenges posed by Internet streaming businesses.

The film business is looking good
Though the film business can swing quickly, the sector ended up becoming a winner for Time Warner in 2013. The company's Gravity did well at the box office, and the IMAX version of the movie passed $100 million in revenue. The performances of The Lego Movie and 300: Rise of An Empire helped the company increase its 2014 fiscal first-quarter profit by 71%. Going forward, investors can expect the successful release of Batman vs. Superman in 2016.

HBO is an impressive asset
In fiscal 2013, HBO saw its biggest subscriber growth in 17 years. This didn't translate into chunky profit growth due to high operating costs. Still, HBO is an important asset of the parent company.  It saw its revenue rise 9% in the recently ended fiscal first quarter, which stemmed from an increase in revenues from subscriptions. Though it isn't performing like Netflix (NASDAQ:NFLX), HBO gained 2 million customers in 2013.

Walt Disney grew its net income to $1.8 billion in the first quarter of fiscal 2013. Its massive Star Wars franchise should make investors take a closer look at the company. Though Time Warner has made some serious strides in the film business, Disney has gotten off to a much more successful start in the sector. Disney plans to launch All New X-Men and Guardians of the Galaxy in 2014. Its CGI extravaganza sequel 300: Rise of an Empire is tracking for a huge international take.

For a time, Netflix did not compete directly with Time Warner. However, its recent success with its streaming original shows has put it into competition with HBO. In the fourth quarter of fiscal 2013, Netflix's net income came in at $48 million. In addition, its revenue increased to $1.2 billion. It recently signed a deal with Comcast to ensure that customers can watch its content without problems.

Foolish takeaway
In its recently ended fiscal first quarter, Time Warner's top line ticked up just 2% to $5.58 billion. The company delivered an impressive 26% gain in adjusted earnings per share. In addition, its business-services sales remained strong. The company's proposed merger with Comcast, promising film segment, and assets like HBO should convince existing investors to stay with the cable giant.

Your cable company is scared, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 


Mark Girland has no position in any stocks mentioned. The Motley Fool recommends Imax, Netflix, and Walt Disney. The Motley Fool owns shares of Imax, Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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