At the height of the dot.com craze, two companies announced their intent to merge in what has become arguably the worst merger decision ever. When AOL announced it would acquire Time Warner (TWX +0.00%), for over $180 billion , investors in both companies were excited. Analysts expected big things and some even called the company an "unprecedented powerhouse." Roughly nine years later, Time Warner spun-off AOL and essentially admitted that this merger didn't work like expected . The stigma of this merger might prevent some from considering Time Warner as an investment, but that is a huge mistake.
A different kind of powerhouse
What Time Warner offers investors today is a media, film, and entertainment conglomerate that can reward shareholders with both growth and income. In the company's most recent quarter, it reported revenue growth of 10% year-over-year. This revenue growth was second only to competitor CBS' (CBS +0.00%) 11% increase which led its peer group. However, if you exclude Time Warner's publishing business which is being spun-off, revenue growth came in at 12%.
While Time Warner's competition are powerhouse companies of their own, it seems that few can match the breadth of the company's offerings. When you're discussing companies like Comcast (CMCSA +0.92%) and Walt Disney (DIS +0.50%) as well as CBS, there is no question their businesses represent some of the most well-known names in entertainment.
Time Warner's TBS and TNT stations have to go head to head with Disney's ABC, Comcast's NBC, and CBS every day. While Time Warner also has HBO, which is arguably the most respected franchise in the business, even this business has challenges. Companies like Showtime, Netflix, and even Amazon's Prime service are developing shows that compete with HBO.
That being said, Time Warner not only competes well with these companies, but in certain instances the company is just flat out better than its peers.
Better than the rest
In the last quarter, Time Warner outperformed its peers by reporting superior earnings and cash flow growth. Looking at the company's earnings growth, Time Warner reported that earnings per share increased by 46% compared to last year. While some of this has to do with the company's strong film and entertainment results, when you consider that the next strongest annual EPS growth was 30% by Comcast, you can see how impressive these results really are.
Some investors may ignore EPS growth in favor of cash flow growth and that makes some sense. One-time items can make EPS growth come in stronger or weaker than the company otherwise would have reported. That's why it makes sense to use a core operating cash flow figure to compare companies. Core operating cash flow consists of net income, plus depreciation minus capital expenditures. By using this measure, investors can avoid some of the one-time accounting changes that aren't cash related.
Look at how Time Warner compares to its peers using this metric:
|
Name |
Core op. cash flow growth year-over-year |
|---|---|
|
CBS |
11.4% |
|
Comcast |
5.9% |
|
Disney |
7.1% |
|
Time Warner |
37.6% |
(Source: SEC filings )
Clearly Time Warner is crushing the competition in both earnings and cash flow growth.
Rise of an empire
Like brave King Leonidas leading the 300 into battle, Time Warner has an enviable lineup of movies that should drive the film and entertainment division for the next few quarters. With current releases like Gravity looking like a hit for the company, and The Hobbit: Desolation of Smaug at the end of the year, the rest of 2013 looks good for Time Warner. Next year is nothing to sneeze at either with 300: Rise of an Empire due out.
It's true that Disney in particular has strong movies coming out as well with Thor: The Dark World and the continued development of The Avengers franchise characters. Unfortunately, Comcast's Universal Studios has already released probably its biggest hits with The Fast and the Furious 6 and Despicable Me 2 already having their best days.
The bottom line is, if you are an investor looking for growth and income from an impressive franchise, look no further than Time Warner. Strong revenue and earnings growth, cash flow growth, and an impressive film lineup should be enough to give Foolish investors returns worthy of a king.
