Game of Thrones & The Tale of Time Warner

By Soroush Pour - May 30, 2012 | Tickers: NWSA, TWX, VIAB, DIS | 0 Comments

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For fantasy enthusiasts everywhere, the hit HBO original series Game of Thrones provides an escape from the doldrums of daily life, to a world filled with knights, sorcerers, dwarfs, and even a few fire-breathing dragons.  Much like the flames that spew from the mouths of these monstrous creatures, Thrones has breathed life into a surprisingly boring HBO lineup devoid of past hit shows like Sex and the City, Entourage, The Sopranos, and The Wire.  Currently in its second season, Game of Thrones tastefully combines sex, violence, and wittiness to satisfy TV viewers and critics alike.  The show was nominated for thirteen Emmy Awards in 2011, and won the award for “Outstanding New Program” at the Television Critics Association Award.

Perhaps more importantly, the series’ first season brought over 25 million viewers to HBO.  Overseas, it has become the network’s all-time bestseller, drawing over $2.5 million per episode, which is 50 percent more dough ever attracted by The Sopranos.  In fact, Game of Thrones has HBO executives so excited because it is helping the network to reach untapped markets through use of its online video streaming service HBO Go, which was released earlier this year.  Since 2007, the network has seen relatively little growth in U.S. viewers, though its number of international viewers has nearly doubled.  The hope is that this pattern of global growth can be continued with the introduction of HBO Go, lead by shows like Game of Thrones.  Investors can take advantage by looking at one particular stock that stands to benefit from these encouraging trends.

The owner of HBO, Time Warner, Inc. (NYSE: TWX), is one of the largest media corporations in the world.  The company manages a number of cable TV networks including CNN, TNT, and TBS, though their premium-charging peer HBO has the largest growth potential of the bunch, due to its increasing international popularity.  Any boost from shows like Game of Thrones may lift TWX stock, which has lost nearly 8 percent in May.  In the intermediate-term, it has yielded investors a return of 82.6 percent since 2009, though the stock has still not recovered to its pre-recession levels.  

On the plus side, the company’s revenues are trending in the right direction as they have grown faster than major competitors like Disney (NYSE: DIS) , News Corp (NASDAQ: NWS), and Viacom (NASDAQ: VIAB).  Specifically, TWX's 3-year average revenue growth is 3.0 percent, which is higher than the industry average (-1.7%), DIS (2.6%), NWS (0.4%), and VIAB (2.9%).  Moreover, Time Warner has been able to translate this top line success to its earnings, as EPS has grown by 30.1 percent since 2009.  With a Price-to-Earnings ratio (12.8X) below the industry average (15.2X) and its own 10-year historical average (15.7X), it appears that investors are not properly valuing this growth.  In fact, TWX's earnings have historically traded at a 7 percent discount relative to the S&P 500's average.  This year, they are cheaper, trading at a 16 percent discount.  Using the industry average P/E in conjunction with a moderate year-ahead EPS forecast of $2.89, we can set a target price of $43.93, which is coincidentally where TWX was trading before the most recent recession.  This stock currently trades just above $34 a share.  Finally, it is worth mentioning that this company is sitting on a mountain of cash - $2.6 billion in FCF to be exact - so an improvement of its already splended 3.0 percent dividend yield could be on the horizon.  

All in all, investors – of both the fantasy and non-fantasy realms – should take kindly to Time Warner.  It may just become as loved as Game of Thrones.  For more information on this topic and others, visit WealthLift to connect with a vibrant community of investors and finance enthusiasts.

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