It’s Time To Take Another Look At Time Warner Inc Stock

Even if the merger with AT&T falls through, TWX stock deserves to trade above $100

By Luke Lango, InvestorPlace Contributor
There's Little Downside to Owning TWX Stock

Source: Jim Larrison via Flickr (modified)

Time Warner Inc (NYSE:TWX) has been bogged down recently by a dragged out merger with AT&T Inc. (NYSE:T), which has come under heavy regulatory scrutiny.

If the deal passes, then TWX stock holders walk away with $110 per share. But if the deal doesn’t pass, investors are worried that TWX stock will drop. That fear has put a lid on this stock’s upside.

But TWX just reported fourth-quarter and full-year numbers. They were pretty good. Good enough to warrant a second look at Time Warner stock’s standalone value.

If you dig deep and see that Time Warner is growing everywhere matters, and that tax reform will add a huge boost to this company’s earnings power, then it doesn’t take a giant leap of faith to say TWX stock has a standalone value of near the $110 proposed takeover price.

Here’s a deeper look.

Why TWX Is Worth More Than $100

In a nutshell, here’s why I like TWX stock: Time Warner is experiencing accelerating growth across all of its major operating businesses, margins are stable, tax reform will provide a big boost to earnings, and the valuation is cheap.

The biggest part of the bull thesis is that every major operating segment at Time Warner is experiencing accelerating growth. HBO subscription revenue growth has trended from 5% at the beginning of 2017 to 16% by the end of 2017. HBO subscription revenue growth of 16% this past quarter was the best growth rate that business has recorded in over 20 years. Moreover, HBO added 5 million domestic subs in 2017, its largest annual increase ever.

The same thing is happening at Turner. Turner subscription revenue growth has gone from 12% at the beginning of the year to 14% by the end of the year.

Lets put this in context. Cord cutting is still happening everywhere. So that means that HBO and Turner just had record quarters amid a cord-cutting environment. The HBO part makes sense. HBO is largely tangential to cord cutting and as long as they keep producing content like Game of Thrones, subs and revenue will go up.

But Turner is losing domestic subs, and yet revenues are still growing in the mid-teens range.


As more and more content floods cable packages, there is a bunch of stuff on there that consumers just don’t care about (think about those thousand plus channels of stuff you never watch). But there is also a ton of stuff that consumers do care about, and are willing to pay more for.

Turner is that good stuff. Think TNT, CBS, TruTV, CNN, and Adult Swim. TBS, TNT, and Adult Swim were three of the top five ad-supported cable networks in prime-time among adults 18-49 in 2017. Adult Swim’s Rick and Morty was the number one comedy show across all television in 2017, while CNN was the number one digital news destination (it was also number one in 2016).

Because Turner is behind the good stuff on TV, consumers are willing to pay more for that specific content. Therefore, despite cord-cutting, Turner’s revenue growth is positive because of higher domestic rates.

Moreover, TWX’s Warner Bros movie division just wrapped up its best year ever at the box office. Warner Bros film slate grossed over $5 billion globally, led by headline hits such as Wonder WomanIt, and Dunkirk. On top of all that, margins are stable and the company is set to benefit hugely from tax reform (tax reform helped turn $6.46 earnings per share this year into adjusted earnings per share of $7.47).

Bottom Line on TWX Stock

Management is guiding for high single-digit operating profit growth in 2018. If you take that high single-digit growth rate and slap it on $7.47 adjusted 2017 earnings (call it 7% growth), then you’re looking at 2018 earnings of about $8 per share.

In order for TWX stock to trade above $100, it would only need a 12.5-times forward multiple. That seems exceptionally reasonable, considering its trailing 5-year average forward multiple is nearly 15.

The company’s strong Q4 numbers imply that TWX stock doesn’t need a big valuation in order to support higher share prices. In fact, because the financials are improving dramatically, all TWX needs to get above $100 is a below-average valuation.

I like that set-up, so I’m bullish on TWX stock here and now.

As of this writing, Luke Lango was long TWX and T. 

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