Investors Should Be Excited About Time Warner

With operating income up 12% thanks to strong results from HBO and Warner Bros. pictures, Time Warner should excite investors.

May 14, 2014 at 8:30AM

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"We are off to a very strong start in 2014, with results that demonstrate both the returns we can achieve on our investments in great storytelling and the growth potential of our businesses." These words from Time Warner (NYSE:TWX) CEO Jeff Bewkes show the company's excitement over its recent earnings release. Compare this to the lack of excitement about other companies' earnings recently, such as those from Dreamworks Animation (NASDAQ:DWA) which had relatively poor results following underperforming movie investments.

From revenue beats to the growing HBO segment and Warner Bros. profits, Time Warner has shown that it is still driving value for investors. In the earnings release, the company said that its profit would likely grow in the low- to mid-teens percentage range, or better, for at least the next three or four years. If the company can pull that off, that would be something to be excited about indeed.

Earnings release highlights 

  • Revenues of $6.8 billion, up 10% year-over-year
  • Adjusted operating income of $1.6, up 12% year-over-year
  • Adjusted earnings per share up 26% to $0.97
  • Free cash flow up 79% to $1.7 billion
  • 20 million shares repurchased year-to-date, with plans for accelerated share buybacks in coming quarters.

These numbers do not include the results from Time, the company's publishing unit. As one more highlight of the earnings release, Time Warner said that it plans to spin off the under-performing segment this quarter into its own publicly traded company. The company is doing this because it is pinning its future on the booming filmed-entertainment market instead. So far, that strategy seems to have been successful, as The LEGO Movie shows.

Lego Movie Via Forbes

LEGO Movie drives profits of over $190 million. Photo: Forbes

Warner Bros. studios: "Everything is awesome!"
The LEGO Movie, consistent with its theme song of everything being awesome, grossed $252.7 million for Time Warner at a cost of only $60 million. This movie follows successful movies from 2013 that have continued to drive profits thanks to the innovation and market-pleasing work of Warner Bros. studios.

The company promises that with a "slate of movies for the rest of the year... Warner Bros. is positioned to have another excellent year in 2014." The company announced that Warner Bros. is already working on another Lego movie for release in 2017.

With the box office revenues the way they were at the beginning of this year, it may seem that companies can easily create these box-office hits, but don't be so sure. The recent Mr. Peabody and Sherman was not a success for DreamWorks Animation. Because of relatively high costs and poor box-office revenues, the movie caused DreamWorks to take a $57 million writedown for its recently reported quarter, resulting in an overall $43 million loss for the quarter.

Dreamworks has had multiple flops over the last year, with few profitable movies to compensate. Promising to get back to what has made Dreamworks so profitable in the past, CEO Katzenberg told Time journalists that "Movies in the best of times are an uncertain business. We went 16 for 16 hits here. To assume that you will always do that — and now we've had a few that didn't — is foolish." Through better animated movies, more diversification, and new production facilities in China, Katzenberg is working hard to give the company's income statement a needed boost. Still, he will have a lot of catching up to do to continue competing with Time Warner and Disney.

HBO, a growth segment for the company
HBO has been a growing highlight for Time Warner recently, and this quarter proves that. For the segment alone, revenue rose 9% this quarter to $1.3 billion. International Strategy & Investment Group analyst Vijay Jayant showed excitement on HBO by saying, "The Turner Networks and Warner Brothers continue to perform well but we believe HBO could be the real growth story." This has been driven by shows like "Game of Thrones," of which the season 4 premiere on April 6 drew HBO's largest audience since "The Sopranos" finale in 2007. 

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HBO (Home Box Office) increased revnues and operating incomes YoY, and with other works in pipeline, looks to be a continuing area of excitement for the company. Source: TWC earnings presentation

Foolish investment conclusion: Looking for future value
Time Warner is currently trading at a P/E multiple of around 14, which is relatively low and has plenty of room to grow as the company continues posting strong earnings. For investors who are looking for long-term value, there are multiple companies in this space competing for consumers' attention. At least for this quarter, Time Warner is proving that it is one company that can lead this industry.

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Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation. 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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