3 Reasons Time Warner's Stock Could Rise

Now that we've explored the reasons Time Warner (NYSE: TWX  ) stock could fall further, let's reverse the equation and talk about why it might rise again.

Before we get into specifics, it's important to remember that today's version of Time Warner stock is different from the one I purchased in 2011. That stock was burdened with quarter after quarter of declining growth in the publications division. Revenue fell 2.4% in 2013, leading to a 19.8% year-over-year decline in operating income.

Now, Time, Inc. is an independent company, just like another former subsidiary: Time Warner Cable. Cashing in on its best properties has become easier for the newly unburdened entertainment group. In Q2, for example, adjusted operating income rose 17%, in part due to a 23% jump in adjusted profit at HBO. 

The "new" Time Warner reports results from three primary segments: Turner and related cable TV properties, HBO, and Warner Bros. Profit gains in each helped push Time Warner stock up 26% over the past year, and within spitting distance of new highs. What catalysts can investors expect over the next 12 months? Here are three that stand out:

1. HBO is a growth catalyst as well as a category killer

There's so much that makes HBO an important catalyst for Time Warner stock, but nothing matters as much as original programming. Word of mouth has led not only to unprecedented piracy but also subscriber gains. Revenue from member fees improved 10% in the second quarter as the latest season of Game of Thrones averaged 19 million viewers, the largest-ever audience for an HBO original.

Kit Harington stars as Jon Snow in Game of Thrones. Source: HBO.

HBO is also cashing in on originals produced years ago via licensing deals. In April, the network struck a deal with Amazon.com that gives the e-tailer the right to broadcast HBO programs thee years and older to its Prime members. Available inventory includes The Sopranos, The Wire, and early seasons of True Blood, among others.

2. Big brands with blowout potential

For as much as we talk about the success Walt Disney's Marvel brands are enjoying, you'd think there was no other pop culture brand worth mentioning. Warner's box office history with just one character -- i.e., Batman -- shows the folly of that line of thinking:

The Top 5 Comic Book Movies
Domestic
Worldwide
TOTAL

Marvel's The Avengers

$623.4 million

$895.2 million

$1,518.6 million

Iron Man 3

$409.0 million

$806.4 million

$1,215.4 million

The Dark Knight Rises

$448.1 million

$636.3 million

$1,084.4 million

The Dark Knight

$534.9 million

$469.7 million

$1,004.6 million

Spider-Man 3

$336.5 million

$554.3 million

$890.9 million

Source: Box Office Mojo.

We'll have to wait till March 2016 to find out whether Warner has cracked the box office code with other characters from the DC Cinematic Universe, such as Cyborg and Wonder Woman. And yet we know it's possible. Arrow all but proves it.

Actor Stephen Amell's take on the DC Comics character Green Arrow was the most-watched show in The CW's 2013-2014 fall lineup, according to Nielsen data supplied by TV.com. And Warner will add to that portfolio this fall with The Flash on The CW, Gotham on Fox, and Constantine on NBC.

Stephen Amell returns for the third season of Arrow this fall. Source: The CW/Warner Bros.

3. Valuation

Finally, I think it's worth noting that Rupert Murdoch was willing to pay $80 billion to acquire this company. Disney -- its closest peer -- is valued at over $154 billion in market cap. And what does Time Warner merit? Just $65.7 billion in market cap as of this writing. The stock also trades for just 16.4 times trailing earnings, one of the lowest multiples in the sector (source: S&P Capital IQ.) Any move to better monetize its significant franchises could drive the P/E up to industry norms, sparking further gains in Time Warner stock. No wonder Murdoch was interested.

Foolish takeaway

As I've written before, Time Warner is a small but meaningful holding that I aim to keep for decades. And why not? Aside from Disney, no company possesses a greater portfolio of franchisable pop culture media properties. Mix in another strong portfolio at HBO and a compelling valuation, and there's good reason to believe in Time Warner stock at current prices.

3 other stocks poised to profit from cable's demise
Time Warner isn't the only company finding its way in a shifting market. 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.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3074977, ~/Articles/ArticleHandler.aspx, 10/31/2014 6:01:10 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement