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Time Warner: Television at Its Best

Victor Selva

Victor Selva

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Time Warner Inc. (TWX) is one of the largest video content creators and distributors in the world. Apart from owning popular television networks like HBO, TNT, CNN and the CW, this media giant is also established in the film industry. With Warner Bros. and New Line Cinema combining into the largest global filmmaker, this firm is several steps ahead of its competition in more than one way.

Television at Its Best

To most people, the network name of HBO means Sunday nights on the sofa with a bowl of popcorn and no other plans. And this should come as no surprise. Since this company’s portfolio of cable networks makes up for 70% of the overall cash flow, its focus on original programming has been essential for past growth and its distinctive armour. Television shows like Games of Thrones, have undoubtedly set this cable network apart from its competitors AMC Networks Inc (AMCX) and Twenty-First Century Fox Inc. (FOX). Also, its long-term agreements with distributors grants greater income predictability, resulting in a steady stream of affiliate fees and advertising dollars that rise as membership numbers increase. 

By offering award winning content, Time Warner has earned its spot as the most widely distributed premium pay TV service in the U.S. And although the domestic paid subscriber rate has come to a halt in the last five years, the company’s networks have gained a substantial amount of international viewers. With regional adaptations of TNT, CNN, HBO and the CW in over 180 countries, this firm’s thirst for global expansion is prominent. By investing in local productions and entering a partnership with China Media Capital, the leading entertainment investments fund, Time Warner’s future growth is almost guaranteed.

A Step Ahead of the Competition

Another enticing aspect of this firm is its well-spun web of business segments. Apart from its established presence among the TV audience, Time Warner also gains about 20% of its revenues from the high quality film production studio Warner Bros. However, in the digital era, licensing and online distribution agreements are crucial to an entertainment company’s growth. As such, this firm’s future looks bright, between its international deals, syndication rights and online streaming rights for Amazon.com Inc. (AMZN) and Netflix Inc. (NFLX). In fact, the company is so well grounded, that its business model should be able to overcome any potential malice over the next 20 years.

The company’s share price, which has jumped from $47.20 to a current $68.4 per share in barely a year, is indicative of the firm's successful implementation of its growth strategy. This approach includes Warner Bros. acquisition of movie search application Flixster, making it the first movie studio to offer video on demand. HBO’s availability for the Xbox, Kindle Fire and Android tablets will also increase revenues in the future.

Profitable Business and Tempting Price

Time Warner’s reach of 100 million households worldwide, along with its bulletproof business model, grants this company a wide economic moat. Despite the competitive nature of this industry, entry barriers are high, making it difficult for newcomers to override the company’s market dominance. Furthermore, the firm’s sky high ROC of 111.50% and a 20.60% operating margin are quite attractive metrics to keep in mind. Investment gurus Joel Greenblatt and Julian Robertson’s recent acquisitions of company shares, combined with a trading price discount of 17% compared to the industry average, leaves me feeling very bullish about Time Warner’s future.           

Disclosure: Victor Selva holds no position in any stocks mentioned.


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