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May 06, 2008
Time Warner: So Bad It Might Be Getting Good
Time Warner (TWX) reported another mediocre quarter even after adjusting for some items that cause the reported numbers to understate the results. Revenue grew just 2% and adjusted EBITDA grew just 3%. The revenue figure matched estimates while the adjusted EBITDA is a bit ahead. EBITDA strength came from cost controls at AOL that kept the EBITDA decline to just 25%. The company also announced that it will fully separate Time Warner Cable (TWC) although no details were provided. Investors were expecting a final decision on TWC and I believe the weak action in the shares has more to do with this than the financial results.
I thought management was defensive and analysts skeptical, frustrated, and even hostile on the call. For the stock, I think the current position of the analysts and investor community is bullish. We are in give up phase and the stock sits at a multiyear low. Some good news lies ahead in terms of restructuring and a pickup in growth. Segment results in this quarter reveal some underlying strength for the two largest contributors to EBITDA, Cable and Cable Networks. The pending split of Cable leaves open the question of whether value will be conferred to TWX shareholders and in what manner so right now investors won’t pay for the better results at Cable. Similarly at Cable Networks, heavy [program investments are restricting margins so the strength in ratings and advertising is no flowing through and thus going unrewarded.
With Cable having its own currency already and now showing some improvement in subscriber metrics, I think that AOL remains the biggest obstacle to a higher stock price. Any transaction involving AOL that creates clear value in the $12 to $15 billion range would significantly help TWX's stock price if it meant AOL was separated from TWX. The Yahoo situation cries out for TWX management to get involved....
....1Q08 EBITDA growth of 3% adjusted is below the gull year guidance of 7-9%. Management reiterated guidance which means that growth has to pick up sharply over the balance of the year. On the call, management pointed out that excluding AOL, EBITDA grew 8% in the quarter. This occurrence would be the best catalyst for TWX shares and there is reason t believe thanks to this quarters' segment results.
TWC had a good quarter with revenues up 85and EBITDA up 7%. Subscriber growth metrics beat estimates across the board including growth in basic subscribers. These results suggest that cable industry expectations have been effectively reset to levels that won’t disappoint and may even surprise to the upside.
Cable Networks had excellent advertising growth of 13%, the second consecutive quarter of double digit growth. Programming expense growth will slow later this year so flow through to EBITDA should commence.
These two segments represented 75% of adjusted EBITDA this quarter. If AOL can turn traffic growth into positive advertising growth, the shares will rally. I am not confident in AOL as I still think it is a horribly weak brand but the core AOL business is a shrinking part of the mix so some hope remains. Easier comps in 2009 will also help.
I am getting intrigued by TWX as a contrarian call. The stock action is terrible. The press is horrible. Analysts and investors are frustrated. But the underlying assets offer better growth than they have recently shown and signs of improvement exist. As Doug Kass likes to say, it makes me go hmmmm.
Posted by Steve Birenberg at May 6, 2008 09:26 AM in TWX
1.THERE IS AN EXCELLENT ARTICLE IN THE MAY7 NY TIMES BY HEATHER TIMMONS ABOUT MTN AND POSSIBLE PURCHASERS[I.E CHINA/INDIA AND EVEN RUSSIA]
2.POSITIVE PIN ACTION IN THIS REGARD COULD CERTAINLY AFFECT MICC AND THE ENTIRE WIRELESS INDUSTRY.
3.THE QUESTION IS ABOUT THE VALIDITY OF THESE RUMOURS AND ,IF TRUE,ULTIMATELY AT WHAT EBITDA MTN IS SOLD FOR.CERTAINLY THIS ACTION WOULD AFFECT THE PRICE OF WIRELESS STOCK INCLUDING MICC.
THE QUESTION IS WHETHER OR NOT MICC COULD REACH ITS 52 WEEK HIGH AT ABOUT $126 {OR EVEN SHORT TERM
$130}.
4.WHAT IS HAPPENING CONCERNING CETV AND THE TURKISH STATION.
You are right that the impact of MTN on other stocks depends on if a deal gets done, at what price, and who the buyer is. In a well priced and financed deal at a premium the spillover to other wireless stocks would be real. No way of knowing how this will play out , however, but be patient with MICC it clearly wants to go higher and it has shown real leadership in a bad market which is always a good sign when the mkt trend reverses.
No news at all on CETV and Turkey. The CEO did comment on the last call that we should not pay attention to the rumors because most of them are way off. I immediately though he might be talking about Turkey. Closing of Ukraine and the new strategic plan there is the next big step. I'd like to see them get a handle on Ukraine before entering another big country but the opportunities come when they do. I am sure they would enter Turkey or Poland or Russia in the right deal.
Posted by: Steve at May 7, 2008 08:26 AM