What’s Tripping Up Time Warner

by Jonathan Berr | August 1, 2012 1:51 pm

Time Warner (NYSE:TWX[1]) shares tumbled Wednesday morning as investors voiced their discontent with the subpar earnings performance at the world’s largest media company. The reaction may have been overdone — and indeed by mid-afternoon TWX was trading up again, by around 1.5%.

Net income at the New York-based company fell 33% to $430 million, or 44 cents per share, versus $638 million, or 59 cents, a year ago. Revenue at the parent company of Warner Bros. slumped 4% to $6.7 billion. Excluding one-time items, profit was 59 cents, a penny better than analysts’ estimates. The revenue figure lagged forecasts of $6.94 billion.

Time Warner’s weaknesses are as glaring as ever, but they shouldn’t overshadow the company’s other strengths. Operating income at the Time Inc. magazine business plunged 43% to $97 million as advertising and subscription revenue plummeted. Sales at the business fell 9% to $858 million.

Time Warner named Laura Lang to head the division in January. So far, she has revamped Time Inc.’s management team and has hired Bain & Co. to advise it on areas of potential growth. So far, not much has changed. People, Time and Entertainment Weekly — key Time titles, all saw advertising revenue drop in the January through June period, according to The Association of Magazine Media.[2] Unless dramatic improvements are made, Time Warner will face increasing pressure from investors to unload this legacy business just as it exited the music business a few years ago.

The weaknesses at cable network CNN are hidden in the results of Time Warner’s Networks businesses, which include HBO, TNT and TBS. The business overall had a mediocre quarter. Operating income fell 5% to $974 million, while revenue jumped 4% to $3.6 billion.

Time Warner senior brass has let it be known for months that they’re displeased with CNN’s subpar performance, which has been underscored by record-low ratings and embarrassing errors such as initially getting the Supreme Court’s health care decision wrong.

Many investors were probably confused by Time Warner’s recent decision to accept CNN head Jim Walton’s resignation but allow him to remain at the company until the end of the year. That’s especially strange considering that even Walton says the all-news channel needs “new thinking.” Maybe Time Warner figures things couldn’t get much worse.

According to The New York Times[3], CNN is set to earn $600 million in operating profit this year, a record. Investors shouldn’t take too much comfort in that figure, though, because it probably includes CNN’s sister network HLN. Earlier this year, the Project for Excellence in Journalism[4] pegged 2011 profit from the two networks at $595.8 million. News Corp‘s (NYSE:NWS[5]) Fox News Channel, which has ruled the ratings roost for years, generated about $870 million, while Comcast‘s (NASDAQ:CMCSA[6]) MSNBC, which often beats CNN in the ratings, made $187 million.

The problems at Time and CNN could be overlooked more easily were it not for the poor performance at the Warner Bros. studio, which saw revenue fall 8% to $2.6 billion and operating income drop 13% to $134 million because of a lack of hit movies. Warner Bros. may see some improvement in the coming quarters because it has orders for 16 returning and nine new shows. Since the studio business is so unpredictable, investors shouldn’t rely on it in their investment decision-making.

Time Warner trades at a price-to-earnings ratio of 14.4, near its five-year low, according to Reuters. The problems at Time and CNN are clearly an overhang on the stock, but any slide may present a buying opportunity. After all, Wall Street has an average 52-week price target on the stock of $42.80, about 8% above where it currently trades.

Jonathan Berr does not own shares of the listed stocks. Follow him on Twitter @jdberr.

  1. TWX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TWX
  2. The Association of Magazine Media.: http://www.magazine.org/ADVERTISING/REVENUE/BY_MAG_TITLE_YTD/pib-Jan-junYTD-2012.aspx
  3. The New York Times: http://com/2012/07/27/jim-walton-to-step-down-as-chief-of-cnn
  4. Project for Excellence in Journalism: http://stateofthemedia.org/2012/cable-cnn-ends-its-ratings-slide-fox-falls-again/cable-by-the-numbers/#cable-economics
  5. NWS: http://studio-5.financialcontent.com/investplace/quote?Symbol=NWS
  6. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA

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