TWX: Why Time Warner Earnings Shouldn’t Scare Investors

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Time Warner Inc (NYSE:TWX) had a huge hit with the latest installment of The Hobbit franchise, but tough year-ago comparisons, restructuring charges and other factors should cause TWX to post a drop in fourth-quarter earnings on Wednesday.

Time Warner (NYSE: TWX)Time Warner earnings land not long after rival Walt Disney Co (NYSE:DIS) posted a blowout quarter, thanks to strength in its theme parks and the runaway success of Frozenwhich is still generating huge receipts from merchandise despite being more than a year old.

Unfortunately for Time Warner earnings, its big hits in last year’s quarter can’t keep gushing money like Frozenso TWX results are set to suffer in comparison.

True, this year’s latest release in the Hobbit franchise — The Hobbit: The Battle of the Five Armies — was a winner. Indeed, this third film in the franchise has generated nearly $1 billion worldwide.

But last year, Time Warner earnings likewise benefitted from a big Hobbit film — The Hobbit: The Desolation of Smaug — along with other blockbusters, notably Gravity. Earnings were further juiced from the home video releases of Man of Steel, Pacific Rim and The Hangover Part III.

Time Warner earnings will also be weighed down by restructuring charges of approximately $100 million related to layoffs and other items.

For the final quarter of 2014, Time Warner earnings are forecast to fall to 94 cents a share from $1.07 a year ago, according to a survey by Thomson Reuters. Revenue is projected to decline nearly 12% to $7.5 billion.

TWX Earnings Hang on Outlook

The market will likely shrug off the decline in quarterly earnings given the record-setting success of American Sniper. That film came too late to be included in fourth-quarter results, but business has been so brisk that TWX might raise its outlook for the current quarter, as well as fiscal 2015.

TWX is more than the movie business, of course, and that’s where things get a bit more pessimistic. Morgan Stanley recently downgraded TWX to equal weight (hold, essentially) from overweight (buy) on concerns that pay-TV companies will resist higher programming fees and slower growth in online video licensing.

As Morgan Stanley said in a note to clients regarding TWX and Viacom, Inc. (NASDAQ:VIA):

“We believe the next phase in the evolution of these generally well-run, high-margin businesses will be a challenging period of falling returns. The days of pushing through double-digit price increases on its distributors will come to an end. The growth in online video licensing, which has been staggering, has slowed and the related erosion of viewership will accelerate.”

The entry of Amazon.com, Inc. (NASDAQ:AMZN) and Netflix, Inc. (NASDAQ:NFLX) into the movie and TV business also creates a serious long-term threat to TWX. There’s also a worrisome ongoing shift of ad spending out of TV to digital — especially mobile — content.

But that doesn’t mean TWX stock can’t continue to outperform for now. TWX stock is up 30% over the last 52 weeks, while the broader market gained just 13%.

With the fourth-quarter profit decline already expected by market participants, TWX earnings are more likely to offer a chance at an upside catalyst than excuse for a selloff.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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