Inside Wall Street: Rediscover Time Warner

The planned spin-off of the flagship magazine will unlock value for the media and entertainment giant.

By Gene Marcial Mar 28, 2013 2:45PM

 Watching television copyright CorbisIt's time for investors to rediscover Time Warner (TWX), one of the world's major media conglomerates. It owns some of the best-known brands worldwide, such as Time, CNN, HBO, Warner Bros. and Turner Cable.


It's an opportune time to snap up shares of Time Warner primarily because of a momentous new catalyst: The plan to spin off to shareholders Time Inc., the flagship magazine in the company’s publishing business.


When that happens, Time Warner shareholders will be big winners: Untapped value will be unlocked and shareholders will each get shares in another independent company, Time Inc. 


"The separation would create additional value for the stockholders, as it did with the prior spin-off of both Time Warner Cable and AOL in 2009, which led to a substantial increase in value for the company's shareholders," says Joseph Cornell, president of Spin-Off Research.


Time Warner will benefit as much since it will be able to focus more attention on its television networks and film and TV production businesses, thereby improving its growth profile. The tax-free spin-off is expected to close by year-end, but details have yet to be revealed by management.


Since the spin-off, shares of Time Warner Cable (TWC) jumped around 265%, while shares of ex-parent Time Warner leaped some 238%, vs. the S&P 500 index's 108%. AOL's (AOL) stock also zoomed higher during the same period by 133%.


Shares of Time Warner were on a tear even before the company announced the planned spin-off of Time Inc., soaring from $27.90 on Aug. 19, 2011 to $56 on Mar. 28, 2013 -- very close to the 52-week high of $57.85. Since the announcement, the stock has gone up some 2%. Bulls see the stock going to between $63 and $70 in 18 months.


One positive about the stock is that it's held by some of the largest and steady-handed institutional investors, including Capital Group Cos., which owns 8.5% of the stock; BlackRock (BLK), which has a 5.3% stake; JP MorganChase (JPM), which holds 5.1%; Dodge & Cox (DODGX), with 4.6%; and Vanguard Group, with 4.4%.  


Of the three current businesses of Time Warner, the TV networks unit generates 80% of earnings before interest and taxes (EBIT) and 48% of revenues. The filmed entertainment division accounts for 20% of EBIT and 41% of sales, and publishing generates 8% of EBIT and 11% of revenues.


Wall Street expects the market value of Time Warner after the spin-off to climb significantly. "Time Warner is nearing a pure-play status as we estimate about 90% of the company's operating income will be derived from television content and production, which may argue for a higher multiple," says Drew E. Crum, media and entertainment analyst at investment firm Stifel.


The company's decision to do the spin off "strengthens our thesis," Crum says, which centers on an acceleration in core earnings growth over the next few years. His positive stance on Time Warner continues to be  focused on "the company's affiliate renewal cycle for Turner networks, healthy subscription trends at HBO, favorable growth prospects for international, a decent pipeline of TV and film content, and continued redeployment of cash."


Crum continues to rate the stock a buy and increased his priced target to $63 from $58. He figures that, based on comparative figures, Time Inc. is worth between $3 billion and $3.5 billion.


"The planned spin-off of the publishing division could unlock potentially significant 'hidden value' as Time Warner  further charts  a successful path as a TV-centric company, with further benefits seen in increasingly compelling industry fundamentals," says Tuna N. Amobi, analyst at S&P Capital IQ.


Amobi says the potential catalysts for further growth after the deal include upcoming affiliate contract renewals, sizable international opportunities in the emerging and developed markets, and accelerated content licensing through TV syndications and digital streaming.


He rates the stock a buy, and projects total 2013 adjusted EBIT of $6.59 billion and an estimated $7.14 billion for 2014. He also forecasts operating earnings of $3.67 a share for 2013 and $4.19 for 2014, with ongoing stock repurchases.


With the spin-off, "we see ample financial flexibility for continued return of capital" at Time Warner, says Amobi. That's certainly a big positive for the stock.     





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