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Time Warner: A Buy on the Dip?

Ishfaque Faruk
January 29, 2014

Media and entertainment giant Time Warner (NYSE: TWX) has been a stellar company with strong growth in earnings. The company's TV content has become extremely valuable and the company remains focused on creating lots of value for its shareholders.

Time Warner's compelling and highly acclaimed library of original content gives the company a lot of leverage in its negotiations with distributors. The recent pullback in Time Warner's stock provides a good entry point for a company with steady growth in its earnings. 

The TV business is growing
Time Warner's TV networks business has been performing very well. Owing to the growth of Turner broadcasting and HBO, the segment grew its revenue 6% year-over-year to $3.5 billion. The TV segment also posted its highest quarterly operating profit ever at $1.47 billion as operating margin surged to 41.7%.

Time Warner's TV networks business makes up 80% of its total operating margin and the margin of the segment has increased for six consecutive quarters. Turner Broadcasting saw growth in advertising revenue in the last quarter driven by improved pricing and demand and TBS was the No. 2 ad-supported cable network.

HBO has been a standout in the Emmy Awards, winning 27 Primetime Emmys. In addition, HBO acquired the interests of its partners in HBO Asia and it now owns 100% of HBO Asia. As a result, future revenues from HBO should see healthy increases driven by growth in the form of newer subscribers in the Asian continent. The company is making big investments in developing original programming for both HBO and Turner, and these investments should bear fruit in the form of more subscription revenues in the international market.

HBO has roughly 30 million subscribers in the U.S. and it faces strong competition from other premium channels like Starz (NASDAQ: STRZA) and also over-the-top players like Netflix (NASDAQ: NFLX). Starz and Encore lead the premium TV category in the US with a combined subscriber base of 57 million, which includes 22 million at Starz and 35 million at Encore. Starz has constantly been adding original programming as it just recently unveiled Black Sails and it is in the process of adding more shows.

On the other side, Netflix has made its mark as the leading Internet TV network and it hopes to have 48 million subscribers at the end of the first quarter of 2014. Netflix has invested heavily in its original programming slate as well. Competition from other players is a concern for HBO, but HBO offers high-quality originals like Game of Thrones and it is well ahead of competitors with 114 million subscribers across the globe.

CNN had previously seen dips in its ratings, but the company saw notable increases in its ratings for two consecutive quarters even though its main competitors have seen their ratings decline. CNN's operating income has trended down in 2013, but the segment is making investments in programming to grow its revenue again.

Warner Bros. leads in domestic box office
Warner has done very well in 2013 and it has been the leading film studio at the domestic box office. The company saw great commercial success in 2013 with movies like Gravity, The HobbitMan of Steel, and The Great Gatsby.

Revenue from the Film and TV entertainment businesses made up roughly 40% of total revenue for Time Warner, but the consolidated entity only collects 17% of its operating income from these businesses. 

The Warner Bros. TV business has been producing more and more shows. In the current TV season the segment is producing 63 shows, versus 55 shows in the prior season.

In the first nine months, revenues from over-the-top players like Netflix and Amazon were roughly $200 million. Business in this area should see