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Time Warner: More Magic Than Harry Potter

Time Warner (NYSE:TWX) has been in Wall Street’s penalty box for long enough. The parent of Warner Bros., CNN and HBO on Wednesday posted better-than-expected fourth-quarter results a day after rival Walt Disney (NYSE:DIS) disappointed the Street.

Investors, though, yawned at the report, and New York-based Time Warner’s shares closed unchanged at $38.11 — despite the company’s  announcement of a $4 billion stock buyback and a dividend hike of 11%. Maybe investors are still leery about Time Warner’s role in the disastrous AOL merger. It’s ancient history, but it has left a painful legacy.

Under CEO Jeff Bewkes, Time Warner did well by getting rid of AOL in 2009. It has invested heavily in content and will continue to do so in the future. Some of these bets, such as on Harry Potter, have been huge successes. Other projects that are in the pipeline appear promising, while its cable business in well placed to capture its share of advertising spending.

The Potter franchise has been a huge boon. Harry Potter and the Deathly Hallows: Part 2 was the highest-grossing film of 2011, which enabled Time Warner’s Filmed Entertainment business to report that revenue for the year rose 9% to $12.6 million, with adjusted operating income up 16% to $1.3 billion.

Luckily, the hits don’t stop with the boy wizard.

Dark Knight Rises, Time Warner’s latest installment in the Batman franchise, should do well at the box office, if the buzz surrounding the release of a trailer in December that featured Anne Hathaway as Cat Woman is any guide. The film is slated to be released in July. Plus, video game Batman: Arkham City shipped more than 6 million units worldwide in 2011, making it one or the top 10 selling games in North America.

Advertisers probably spent more money on cable channels in 2011 than the broadcast networks for the first time ever, according to ad buyer Zenith Optimedia. Like the Internet, cable offers advertisers the ability to target their messages to specific audiences. The younger an audience, the harder it is for advertisers to find. That’s what makes Time Warner’s Adult Swim programming block on Cartoon Network such a cash cow.

If you’ve never heard of Adult Swim’s off-the-wall offerings, such as the hysterical Robot Chicken series that savages pop culture using action figures, you should check them out. A few years ago, Adult Swim found such a huge audience for reruns of a Fox cast-off called Family Guy that the News Corp (NYSE:NWS) network brought it back on the air where it remains today.

Adult Swim drew the biggest audience of males 18-24 and 18-34 in basic cable in January. Time Warner’s TBS, home to Conan O’Brien, was basic cable’s top entertainment network with adults 18-34 and adults 18-49 in primetime for January. The viewership at Time Warner’s TNT also is growing, thanks to the popularity of shows such as Southland and Leverage. Time Warner’s cable business, where revenue grew 9% to $13.7 billion last year, fueled a 12% surge in advertising sales. It’s in the right place at the right time.

Equity analysts think Time Warner has more gas in its tank. The average one-year price target is $41.04, about 7% higher than where the stock trades now. Its price-earnings ratio of 14.42 is near its lowest level of the past five years, according to Reuters. The time to buy the stock is now.

Jonathan Berr doesn’t own shares of the listed companies.

Article printed from InvestorPlace Media,

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