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Time Warner: Poor Ratings Don't Necessarily Mean Bad Box Office Results

By Dan Moskowitz - Sep 16, 2013 at 12:21PM

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Time Warner is highly diversified and capable of generating revenue in many areas. But that doesn't mean it's the best investment option in its peer group.

"Man of Steel," "The Great Gatsby," and "The "Hangover III," didn't receive great ratings from moviegoers and critics, but investors care more about ticket sales. Therefore, Time Warner (TWX), owner of Warner Bros., might present a good investment opportunity. If it is capable of generating revenue from seemingly lousy movies, then a lot of potential exists.  

Let's go to the movies 
This might not be Time Warner's biggest segment, but it's certainly the most interesting. Despite the three aforementioned movies disappointing viewers, Film & TV Entertainment saw revenue jump 32% to $2.9 billion in the second quarter. That's partially because of hype.

When big titles are advertised and marketed correctly, they're going to draw an audience. Time Warner has also enjoyed an increase in international TV syndication, as well as increased subscription revenue from video-on-demand. The only negative for the previous quarter was a decline in domestic licensing revenue.

Let's take a look at how recent movie titles have performed in regards to ratings vs. ticket sales:

 

Rotten Tomatoes Score

Budget

Worldwide Box Office Ticket Sales

"Man of Steel"

56%

$300 Million

$661 Million

"The Great Gatsby"

49%

$160 Million

$346 Million

"The Hangover III"

19%

$155 Million

$351 Million

"We're the Millers"

47%

$70 Million

$182 Million

"The Butler"

72%

$57 Million

$94 Million

"Getaway"

2%

$35 Million

$9 Million

Source: Boxoffice.com

As you can see, Warner Bros. is capable of producing and releasing an average movie and making a profit, thanks to strategic and highly effective marketing. This should comfort investors. And if you liked that movie chart, there are two more below.

Walt Disney (DIS -1.47%) hasn't outperformed Time Warner over the past five years, appreciating "only" 100% versus 113% for Time Warner. But like Time Warner, Disney is highly diversified. Also like Time Warner, it owns networks (including ABC, ESPN, A&E, and Lifetime), and it's in the movie production business. Some of its most-recent releases, ratings and results, are listed below: 

 

Rotten Tomatoes Score

Budget

Worldwide Box Office Ticket Sales

"Oz: The Great and Powerful"

59%

$280 Million

$493 Million

"Monsters University"

78%

$270 Million

$724 Million

"Planes"

25%

$90 Million

$122 Million

"The Lone Ranger"

30%

$290 Million

$243 Million

Source: Boxoffice.com

By this point, you might be considering entering the movie production business. However, you could always flop with something like "The Lone Ranger." This one will hurt Disney a little. At the same time, Disney is one of the strongest brands in the world, which gives it tremendous marketing power. And it doesn't often miss on its movie titles. Furthermore, Disney currently yields around 1.20%.  

For further comparison, as well as a look into another highly diversified company, we must include Sony (SONY 1.43%). Below are some of the more popular and most-recent Sony Pictures titles: 

 

Rotten Tomatoes Score

Budget

Worldwide Box Office Ticket Sales

"This Is The End"

84%

$62 Million

$118 Million

"White House Down"

50%

$190 Million

$153 Million

"One Direction: This Is Us"

65%

$30 Million

$51 Million

"Grown Ups 2"

7%

$130 Million

$214 Million

"The Smurfs 2"

12%

$170 Million

$268 Million

"Elysium"

68%

$155 Million

$214 Million

"The Mortal Instruments: City of Bones"

12%

$90 Million

$66 Million

Source: Boxoffice.com

Notice that in most cases, it doesn't matter how well a movie is received. Rather, it's more important how a movie is marketed. Sony has proven to be yet another company that can print money with effective, or perhaps even slick, movie marketing. As far as diversification is concerned, Sony also sells electronic equipment, PlayStation, B2B business solutions, and much more.

However, Sony has had more trouble staying consistently profitable than its peers, and it currently trades at 26 times earnings. Time Warner and Disney are trading at 17 times earnings and 20 times earnings, respectively. Sony also yields the same as Disney, which isn't as impressive as Time Warner at 1.90%. 

Conclusion
Time Warner owns extremely valuable network brands; it has the potential to release blockbuster movies, and it likes to reward its shareholders via share buybacks and dividends. While it's not as strong of a name as Disney, it has been just as impressive on the movie production side recently, and it's always capable of producing and releasing a new profitable title.

All factors considered, Time Warner should be viewed as an investment option. If the stock suffers due to broader market weakness, then you can always add on dips. That's the key to investing, sticking with high-quality and resilient names so you can build your position on weakness. 

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of 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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Stocks Mentioned

The Walt Disney Company Stock Quote
The Walt Disney Company
DIS
$123.12 (-1.47%) $-1.84
Sony Corporation Stock Quote
Sony Corporation
SONY
$87.34 (1.43%) $1.23
Time Warner Inc. Stock Quote
Time Warner Inc.
TWX

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