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January 31, 2006

Time Warner Earnings Preview: Will The Boredom End?

If there were an equation that measured media and analyst coverage vs. stock price volatility, Time Warner (TWX) would probably produce an answer nearing infinity. Dare I say a google.

Tomorrow provdes the stock another chance to offer some excitement when TWX reports 4Q05 earnings. The results are expected to be quite strong, consistent with analyst expectations and management guidance. Year-to-date, revenue and EBITDA growth are an anemic 2.5% and 3.9%, respectively. All year management has stated that EBITDA growth would be in the upper single digits for the full year, so much is riding on the fourth quarter. Due primarily to an easy comp and strong quarter in theatres and home video in the Filmed Entertainment division, analysts are expecting EBITDA growth ranging from 16-20% in the quarter. Continued steady growth at Cable and Networks should also contribute while growth in Publishing and AOL may lag. For the record, revenue is expected to come in at $2.87 billion, EPS at 22 cents, and EBITDA up 18%....

The bigger question for TWX shares is what commentary the company will provide on 2006. Over the past week, several analysts have lowered their EBITDA growth assumptions from the upper single digits to 6-8%. Tougher comps at film due to slowing DVD growth, ongoing challenges at publishing, and higher expenses at AOL due to the broadband rollout are the primary culprits. I am confident Cable will enjoy another year of low double digit growth in 2006, but I remain a lonely voice worried that Networks will continue to slow as cable channels like TNT, CNN, and TBS no longer gain a big benefit from subscriber growth.

I still believe that on a sum of the parts basis TWX shares are undervalued by 20-25%. I also believe that the undervaluation is not so severe as to warrant all the consternation from investors, analysts, and Carl Icahn. TWX is a mature traditional media company with a lagging and poorly positioned online business at AOL. The only way the stock will shows significant appreciation above the 20% level is if multiples across all media businesses begin to rise. It is hard to expect that given the growth challenges posed by the internet and media fragmentation. However, that view is widely held so some consideration should be given to the contrarian call.

I'd rather own more narrowly focused media companies in each of TWX's main businesses than own the diversified, slow moving giant that is TWX. For Cable, givem me Comcast. For Filmed Entertainment, give me Lionsgate, for Networks give me E.W. Scripps or Viacom or CBS, for internet exposure give me Yahoo or Google. And if I want a diversified play, give me Disney, which offers steady double digit growth and has all its major businesses contributing to the growth at the same time.

Posted by Steve Birenberg at January 31, 2006 02:16 PM in TWX