Shares of Time Warner (NYSE:TWX.DL) have recovered from a sell-off in the wake of Twenty-First Century Fox's (NASDAQ:FOXA) abandoning its $85-per-share bid. Can the rally continue? How might investors following Warner think about the business? Here's what management had to say in the most recent earnings conference call.
Time Warner stock is worth sticking with
CEO Jeff Bewkes is unabashedly bullish on his company's stock, touting, among other things, $2 billion worth of stock repurchases last quarter. The board has authorized up to $5 billion for additional buybacks in future quarters. Here's Bewkes explaining the rationale for a big bet on Time Warner stock:
Our strong results both this quarter and the last several years are evidence that our strategy is working. By focusing on the right set of leading brands and assets, on operational excellence and on disciplined capital allocation, we've been able to achieve the highest total shareholder returns of any company in our peer group over the last six years.
The best in six years? I suppose that depends on the specific date range and how you account for dividends. On the surface, though, Warner still trails Disney (NYSE:DIS).
HBO gives Time Warner a competitive advantage
While Fox didn't explain precisely why it was willing to pay a premium for Warner, observers cited HBO as a key asset. My own valuation pegs that segment at $26 billion or better, or nearly 40% of Time Warner's market cap. Bewkes comments speak to HBO's advantages over rivals:
HBO remains at the top of its game. Recently receiving 99 Primetime Emmy nominations, which is the most of any network for the 14th year in a row. It's also more than double the nominations of its closest competitor for the second straight year.
Yet programming is only part of the story. Bewkes says that smart distribution is also helping HBO to win subscribers in key territories:
HBO GO active users grew 35% year over year in June and is now available in 24 territories around the world. And as we've told you before, we're making investments in the next-generation HBO GO that will be even more powerful and will put us in a strong position to take advantage of consumer demand for multiplatform viewing options here and around the world.
A few focused bets is better than too many bets
Turner contributes more than half of operating income, yet the business is concentrated into a small number of networks. Bewkes explains why, here, diversification isn't in investors' interests:
Turner's [four] most important networks, TNT, TBS, CNN, and Cartoon Network, account for 85% of its domestic affiliate fees. That concentration is the result of a deliberate strategy of focusing our investment on a small group of top-tier networks to ensure that they are must-haves for both consumers and distributors. In a world where consumers are becoming more discriminating in what they watch and where distributors are looking to create smaller bundles of networks, we think that's the right strategy, and it puts us in a great position to increase share over time.
Franchises are the future
Warner Bros. routinely leads the market in the number of movies produced and released, but it's Disney that has done best with monetizing franchises. Bewkes sees that changing:
Along with the release of with the second Hobbit installment, The Lego Movie also helped us to maintain our No. 1 position in home video in the quarter. It's just the latest example of Warner's unequaled ability to create franchises with two additional Lego titles already in development. That adds to an already strong pipeline of franchises built around DC Entertainment and the new series of films from J.K. Rowling based in the world of Harry Potter. Our franchise pipeline gives us great confidence Warner Bros. will continue to lead the film industry, building on a track record that includes the No. 1 position at the domestic box office seven out of the last 10 years and the No. 1 spot in home video for 13 straight years.
He's right about The Lego Movie, which earned $468 million worldwide despite a February release. The film added another $37.6 million in domestic home video sales, according to The-Numbers.com.
And in that future, DC Comics properties will be the cornerstone
No franchise has as much potential as Warner's stable of DC superheroes. Batman alone has earned billions at the global box office. He'll team up with Superman and Wonder Woman in 2016's Batman vs. Superman: Dawn of Justice. In the meantime, fans can get their fill on TV. Here's Bewkes explaining the opportunity:
Warner will have 31 shows on broadcast networks, including at least two primetime series on each network and 60 shows overall across broadcast and cable. Now, what's also really notable and unprecedented is that five of those shows are based on IP from DC Entertainment, including the highly anticipated Gotham on Fox, The Flash on TheCW and Constantine on NBC. That's early evidence of Warner's ambitious plans to further mine the DC catalog across our television, film, video game, and consumer products businesses.
While each of those shows will be produced by Warner Television, Arrow and The Flash may be the biggest catalysts for how they'll feed each other airing on back-to-back nights. (Tuesdays and Wednesdays this fall.)