Fourth quarter results came out February 2, and Time Warner (NYSE:TWX) delivered good news, growing revenues by 8% to $7.8 billion and net earnings 22% to $769 million. The strong finish to 2010 bodes well for 2011. The company's film, television and publishing divisions all increased revenues in the past year. To keep the pedal to the floor, CEO Jeff Bewkes says it plans to continue its global expansion. With Time Warner Cable (NYSE:TWC) and AOL (NYSE:AOL) distant memories, the content king appears to be a very appealing long-term investment.
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In the past few years, Time Warner's expanded the HBO brand through joint ventures in Europe, Asia and Latin America. In order to take advantage of the growth in these growing markets, the company is made a concerted effort to take control of these entities. In January 2010, it acquired 100% of HBO Central Europe, a joint venture with Sony (NYSE:SNE) and Walt Disney (NYSE:DIS). In February 2010, it acquired majority control of NDTV Imagine Limited, a Hindi general entertainment channel in India. Earlier deals saw it acquire majority economic control of HBO Asia, HBO South Asia and HBO Latin America. These acquisitions will pay dividends down the road.
As part of its earnings announcement, Time Warner announced its partnership with Comcast (Nasdaq:CMCSA) to allow cable subscribers to watch Time Warner properties such as TNT and TBS over the internet. Its "TV Everywhere" concept will be in 70 million homes by the middle of 2011. Bewkes believes the additional affiliate fees it will receive from Comcast and others (because of the multiple platforms available to watch its shows) will be a major driver of growth in the coming years. More importantly, it signals that people are still willing to pay for television content and while its plans have been slow moving until now, the announcement suggests it will profit nicely.
Video on Demand
On the film front, Time Warner looks to make more money from its Warner Brothers division, implementing "premium" video-on-demand in the second quarter. Its movies will be available a month sooner on cable and the internet, just 60 days after theater release and before DVD release. The cost to customers will be between $30 and $60.
In concert with this move, the company likely will revisit its DVD distribution agreements with Netflix (Nasdaq:NFLX) and Red Box, both in terms of the time the companies would have to wait to get films and how much they'd pay. It's too early to tell what this means to the bottom line but you have to give it credit for pushing the envelope. It's about time movie companies got aggressive.
Ben Graham had a rule that he wouldn't look at any company whose current price-to-earnings ratio (three-year average) multiplied by its price-to-book was higher than 22.5. Time Warner's current product, using a two-year average instead of three due to large losses in 2008, is 18.8, well within the conservative investor's guideline. So too are its P/S and P/CF.
With a 2.4% yield and its entire business performing well, I see a stock that's trading below its future potential value. (The DCF method can be difficult to apply to real-life valuations. Find out where it comes up short. Check out Top 3 Pitfalls Of Discounted Cash Flow Analysis.)
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