Consider This Stock for Its Powerful Networks

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Time Warner (NYSE: TWX) is a $47 billion company and operates as a media and entertainment business in the United States and internationally. It operates in three segments: Networks, Filmed Entertainment, and Publishing.  Its networks consist of both pay programming such as HBO and Cinemax, while also operating traditional television networks such as TBS, TNT, and CNN.  The Filmed Entertainment segment produces and distributes theatrical motion pictures, television shows, and videogames under the Warner Bros. and New Line Cinema brands.  Finally, its publishing segment holds brands such as People and Sports Illustrated.

The company competes with Disney (NYSE: DIS) and CBS (NYSE: CBS).  Disney is a media conglomerate, with a market capitalization of $90 billion and a wide array of network brands, including ABC and ESPN.  Disney reported solid group 2012 results, with sales increasing 3 percent year over year.  However, its Media Network segment saw sales increase by only 4 percent, and its Studio Entertainment division saw sales decline by 8 percent in 2012.  CBS is the smallest competitor of the three, with a market capitalization of roughly $25 billion.  CBS performed modestly well in 2012, with revenue in the third quarter and the first nine months increasing 3 percent versus 2011.  However, investors would be wise to take a closer look at Time Warner because of its higher dividend yield and much better performance of its networks.

Time Warner 2012 in Review & Future Growth

The company had a solid fiscal year 2012.  In November, Time Warner reported adjusted earnings per share rose 9 percent versus the prior year, largely on the strength of its Networks segment.  At the same time, Time Warner reaffirmed that 2012 full-year percentage growth rate in adjusted EPS to be in the low double digits off a 2011 Adjusted EPS base of $2.89.

That segment saw adjusted operating income growth in the double digits, to its highest level ever.  The company specifically highlighted TBS and HBO as primary reasons for success in the Networks segment.  TBS is now the number one cable network for adults aged 18-34.  In addition, continued success of HBO programming resulted in 23 Primetime Emmy awards for HBO, the most of any network for the eleventh consecutive year.

The Network segment is the most important one for Time Warner's future.  Television networks represent more than two-thirds of Time Warner’s profits.  Therefore, continued development of successful TV programming is critical for Time Warner.  Management is optimistic here as well, pointing to the newly arranged 14-year contract with CBS and the NCAA to broadcast the Division I Men’s Basketball Tournament, one of the most highly watched sporting events in the United States.   Management also points to the international acquisitions of TV networks the company has made in an attempt to take advantage of emerging market growth.

The Filmed Entertainment segment performed well and the company is optimistic about its future film releases.  2012 saw some high-profile releases, including The Dark Knight Rises, which brought in over $1 billion at the global box office, as well as The Hobbit: An Unexpected Journey. For 2013, Time Warner is particularly excited about its upcoming release, The Great Gatsby.

Unfortunately, Time Warner’s Publishing segment continues to be a drag on results.  Consumers are shifting away from print publications and utilizing mobile content.  Time Warner is trying to join the trend by offering content on non-traditional channels, including websites, tablets, and other mobile devices.  Fortunately, the Publishing segment accounts for only 12 percent of the company’s sales.  The downward effect on the company’s business will be mitigated because of this, and Time Warner should have no trouble expanding its already strong position going forward.

Bottom Line

The company’s stock trades for a P/E of 18 times trailing twelve month earnings, and only 14 times forward earnings.  The stock also satisfies income seeking investors with a current yield of greater than 2 percent and a strong record of annual dividend increases over the past few years.  The strength of Time Warner’s networks and film studio gives investors a good reason to delve into the company further.

Robert Ciura 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!

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