3 Reasons Time Warner’s Stock Could Fall Further

Intractable management, concentration risk at Turner, and a troubling lack of franchise firepower could take a bite out of Time Warner stock.

Aug 15, 2014 at 10:09PM

What had been a sustained rally in Time Warner (NYSE:TWX) stock stalled earlier this month when Twenty-First Century Fox (NASDAQ:FOXA) officially rescinded an $80 billion bid to acquire the media giant:

TWX Chart

TWX data by YCharts.

Super results, a not-so-super stock

Today, the "new" fully independent Time Warner only commands $65 billion in market cap. And that's despite strong Q2 results. Revenue improved 3%, to $6.8 billion, while earnings rose 29%, to $0.98 a share, beating the consensus estimate by a whopping $0.14 a share.

HBO provided much of that growth. Division revenue improved 17%, to $1.4 billion, including a 56% jump in content revenue thanks to an April deal with Amazon.com that brings some of HBO's older shows to the e-tailer's Prime streaming media service. Financial terms weren't disclosed at the time, but a $98 million year-over-year increase suggests it was lucrative.

Newer programming also paid off in the second quarter. In the earnings release, Warner said that the fourth season of Game of Thrones averaged 19.0 million total viewers, surpassing the 2002 season of The Sopranos as the most-watched in HBO programming history.

Three reasons Time Warner stock could fall

If only that impressed investors. Instead, there seems to be widespread fear that Fox's bid is as good as it's going to get. Short interest -- a measure of the portion of investors betting against the stock -- has risen steadily during the past years, and sharply in the days since Fox's first bid. (Source: S&P Capital IQ.) Here are three signs the skeptics may be right:

1. Intractable management. Time Warner CEO Jeff Bewkes didn't just refuse Rupert Murdoch's offer. Apparently, he refused to even consider it. A Bloomberg report says that Warner sent Fox a "terse letter" rejecting the bid. Instead of talks, there was a "brief phone call." As a shareholder, I'd like to believe that Bewkes would at least entertain any serious offer. That he didn't here suggests we won't see a new deal anytime soon, if ever.

2. Concentration risk. Turner Broadcasting has done well, but represents more than half of Warner's operating income. New investments in original programming to distinguish TNT -- including the sci-fi adventure The Last Ship -- could pay off nicely if they hit. Yet, the quality and variety of online and cable programming could take a bite out of Turner's viewership, and Warner's profits.

3. Franchises are still in the development stage. With The Hobbit franchise ending soon, Warner Bros. doesn't have much in the way of a proven box office commodity. DC movies appear to be promising given the success of Man of Steel and the buzz for Batman vs. Superman: Dawn of Justice. There are no guarantees, however. We've seen both Batman and Superman fail at the cinema in prior years. No matter: Warner has committed dates for 10 new films aimed at beefing up the DC Cinematic Universe, kicking off billions in production and marketing costs with no promise of a significant return.

Batman Vs Superman Dawn Of Justice

Batman vs. Superman: Dawn of Justice kicks off a 10-movie plan to grow the DC Cinematic Universe. Credit: Warner Bros.

Foolish takeaway

Time Warner stock has been a personal holding since 2011. If all goes well, I'll keep them through retirement, and well into old age. But as an investor, I also can't ignore the risks. Bewkes' apparent stubbornness in dealing with Fox, concentration risk in the form of Turner's outsized contribution to operating profit, and a troubling lack of movie franchises leaves Time Warner stock exposed, prone to falling further than it already has.

Leaked: Apple's super device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

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 Apple and Time Warner at the time of publication. Check out Tim's web home and portfolio holdings or connect with him on Google+Tumblr, or Twitter, where he goes by @milehighfool. You can also get his insights delivered directly to your RSS reader.

The Motley Fool recommends Amazon.com and Apple. The Motley Fool owns shares of Amazon.com and Apple. 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers