Joel Greenblatt (Trades, Portfolio) is founder and managing partner of Gotham Asset Management, LLC. He is known for the invention of Magic Formula Investing. He is the author of two investment books, including Joel Greenblatt: The little Book that Beats the Market
Greenblatt tries to find cheap and good companies. He looks for value with a catalyst. Greenblatt likes special situations, and thinks that they are simply different places to find cheap stocks. In his own hedge fund, Greenblatt uses the basic principals in the Magic Formula: Look for high ROC and high earnings yield. He tries to figure out what "normalized earnings" will be 3-4 years into the future. Greenblatt makes sure the stock is very cheap based on normalized earnings.
Last quarter, he increased his holdings in Time Warner (TWX) by buying 11,025 shares. As of March 31, 2015, he was holding 17,253 shares of the company. Time Warneris a leading media and entertainment company. The company classifies its businesses into the following reportable segments:
- Home Box Office, consisting principally of premium pay television services domestically and premium pay and basic tier television services internationally;
- Warner Bros., consisting principally of feature film, television, home video and videogame production and distribution; and
- Time Inc. (TIME), consisting principally of magazine publishing and related websites and operations.
The company has posted impressive growth in the recent past and its EPS has grown from $3.00 in FY2012 to $4.31 in FY2014. Last year, the company reported strong financial performance with solid revenue growth and 18% growth in adjusted EPS. The company's EPS forecast for the current fiscal year is $4.66 and next year is $5.77. According to the consensus estimates, its top line is expected to grow 4.10% current year and 6.70% next year.
The company is increasingly investing outside the traditional TV ecosystem to help ensure that consumers can access its content even if they don't have a conventional multichannel TV subscription. One of the notable examples is the company's HBO OTT service, which is on track to launch later this year. The launch of this service will give Time Warner an opportuinity to reach broadband-only consumers and will reduce the friction of subscribing to HBO for multichannel subscribers that don't currently have the service.
Going forward, the company is targeting adjusted EPS of between $4.60 to $4.70 per share in 2015. The company also plans to invest aggressively in content to accelerate revenue growth in 2016 and reach its target of $6 in EPS by FY2016. Time Warner is trading at 18 times FY2015 EPS. The company has a good tract record of EPS growth and Expects EPS growth in high teens till 2018. During FY2014, the company repurchased $5.5 billion in shares and, combined with dividend, returned $6.6 billion to shareholders.
The company is seeing positive analyst commentary off late. Recently Bank of America analyst Jessica Reif Cohen raised her price target on the company citing:
1) improved visibility on a mid-high teen EPS CAGR,
2) low advertisement exposure (~17%),
3) strong balance sheet with healthy capital returns and
4) upside potential across divisions.
Late last year, Goldman Sachs analyst also upgraded the stock saying Time Warner's set sector-low exposure to the TV ad market is an advantage relative to its peers. I believe the company is a good buy at current levels.
