Time to Jump on the Time Warner Bandwagon?
Steven is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Time Warner's (NYSE: TWX) Man of Steel film is performing well at the box office. Box Office Mojo says it grossed over $250 million worldwide (at the time of this writing). People seem to be enjoying the flick. And there's been much talk about how the success of the project gives Time Warner hope – hope that it can challenge Disney (NYSE: DIS) and its Avengers-universe Marvel asset with a dose of Justice-League heroism.
I've never seen The Avengers, but I know it's been good to Disney and its shareholders. I'm actually fascinated by this new line of thinking, that Time Warner is now a player and that CEO Jeffrey Bewkes might be able to take on the man that Wall Street believes to be one of the best leaders on the planet, Bob Iger. Seriously, the market acts as if Iger can do no wrong and that he himself is like the son of Jor-El. (I think Iger has done some good things, but I do sometimes beg to differ.)
So I'm wondering: since Disney is a perpetual buy based on Marvel and Lucasfilm and all that, what about Time Warner? That company's comic-book division, DC Comics, which certainly isn't some goofy nerdy upstart, might be able to offer up a bit of kryptonite to the Mouse's superhero factory. Tim Beyers nicely summarizes the situation.
The ultimate question is now before us: Has Time Warner become a perpetual buy just like Disney?
A transition awaits
I've tended to own Disney for most of my investing career although I currently don't own any shares; I recently liquidated my position in a bit of profit-taking to combat a market that may have gotten ahead of itself. I'm pretty certain I'll be in the stock again at some point.
But I'm wondering if I, and perhaps others, ought to be looking more closely at Time Warner. I never felt the need to own this equity. Even though the stock has done well over the last couple years, I figured Disney was enough exposure for a portfolio in terms of blockbuster content-production and distribution.
It's the whole Justice League thing that's grabbed my attention. No matter what any of us think, Disney doesn't have a monopoly on the creative exploration of superhero-supervillain conflicts. DC has plenty of high-profile brand names. It doesn't have Spider-Man, but it has Batman. It doesn't have Hulk, but it has Aquaman. And other stuff. (I'm sorry, I'm not enough of a nerd to know more than that without checking, and I'm pretty sure Bugs Bunny does not qualify as a superhero; maybe that Road Runner creature does, though.)
Bob Iger is set to step down from his CEO position in 2015. In other words, Disney will have a new leader. If Iger is Disney right now, as many claim, than one has to do a little due diligence and wonder if a hedge for all the portfolios out there that own an outsized position of the Mouse is in order. Time Warner stock might be that hedge. The company has many impressive divisions besides DC: HBO, TBS, TNT, Warner Bros., etc.
According to the first-quarter earnings release, Time Warner increased adjusted operating income by 7%, and it increased adjusted earnings per share by 22%. Top-line revenue of nearly $3.7 billion was mostly flat, but looking through the rest of the release and taking into account all of the media company's assets, I would say things are going well. According to the latest annual report, cash flow from operations has remained rather steady the last few years, not seeing much growth -- it was roughly $3.3 billion in 2010, and $3.4 billion in both 2011 and 2012.
Disney's second-quarter earnings release shows a growing top line -- revenues at the Mouse jumped 10%. Segment operating income went up by 29%. Adjusted earnings per share increased by 36%. And the latest annual report shows that cash flow from operations has been on the rise -- it was $6.6 billion in 2010 and almost $8 billion in 2012.
And there's a very important metric to consider in all of this: the dividend yield. If there is one thing that has always bothered me about Disney, it's the dividend yield. I've written about this subject a lot, even going back a long time. Granted, the company has come a long way since then, but I still think Disney could pay a higher yield. Right now, Time Warner pays about a 2% yield; Disney is at 1.2%. That disparity should be part of the selection process. Both companies, it should be noted, have been increasing dividend payments.
A third player?
Of course, there's another issue to consider as far as superhero-film investing is concerned: the existential chances of another media company waking up and mounting an attack on both Disney and Time Warner. Doubtful though that may be, you've got to go through the due diligence on it. Sony certainly has Spider-Man, but that asset tends to benefit Disney. Would Viacom (NASDAQ: VIA) eventually break into this area? I do suspect that at some point Viacom will look at the loss of its Marvel deal and attempt to figure something out to counteract it (remember that Paramount used to distribute Marvel product).
You could make a case for Viacom, since it currently has a yield of 1.8%, it owns Disney-Channel-competitor Nickelodeon, and it counts MTV among its platforms. The company's second-quarter release shows a 6% decline in revenue and a 2% decline in adjusted earnings per share. According to the annual report, operational cash flow has been relatively steady over the last two years, but it hasn't seen growth -- 2012 saw cash from operations come in at $2.5 billion, while 2011 delivered $2.6 billion. Viacom will be a major media concern for years to come, and its stock is worth a look, but considering everything in total, selecting a company like Time Warner might be the better bet.
The bottom line
Time Warner certainly might benefit greatly from an Avengers-style Justice League scenario. If, as Mr. Beyers suggests, the Man of Steel picture leads to Man of Steel 2 and 3, and other superhero adventures that eventually culminate into Justice League The Movie, and if writer/producer Christopher Nolan turns out to be Time Warner's Joss Whedon – and isn't this what this is really all about, the father of the Dark Knight vs. the father of the Avengers? – then perhaps investors had better start searching beyond Disney for exposure to the content industry.
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Steven Mallas has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!