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Yamil Berard
Yamil Berard
Articles (192) 

Analysts Raise Time Warner to 'Buy'

It's inevitable that the company will draw other suitors if AT&T deal collapses

March 14, 2018 | About:

A growing number of Wall Street analysts are predicting regulatory approval of AT&T Inc.’s (NYSE:T) bid for Time Warner Inc. (NYSE:TWX) by summer’s end.

UBS upgraded shares of Time Warner to buy from neutral, lighting a buzz of speculation that even if the $109 billion merger is not approved, it's inevitable that Time Warner will draw other suitors. Time Warner now owns cable channels such as HBO, CNN and TNT.

By month's end, AT&T is due to appear in court against the U.S. Department of Justice over its acquisition of the New York-based entertainment company. The DOJ has sued to block the acquisition because of concerns the union will drive up consumer costs and lessen competition.

UBS analyst John Holdulik reportedly wrote in a note to investors that Time Warner’s unique combination of high-quality assets and scale would likely “make it a potential target for further industry consolidation.”

The merger falls in line with the trend for media companies to embrace direct-to-consumer streaming platforms, analysts said.

“With traditional TV subscriber declines accelerating and viewership migrating to online providers, OTT is clearly the future of video distribution,” Holdulik wrote in a note to investors that appeared in MarketWatch on Monday.

“With dozens of offerings in the pipeline and the internet giants spending more than $1 billion a year on content, few will likely survive,” Holdulik wrote. “This is likely driving the Disney bid for Fox, Comcast's bid for Sky and will likely lead to a CBS-Viacom deal.”

Holdulik predicts the AT&T merger with Time Warner is only a matter of time because Comcast's (NASDAQ:CMCSA) acquisition of NBCUniversal pre-dates it and challenges the government’s argument that it will raise costs for consumers. Comcast purchased NBCUniversal in 2009.

"Our math suggests that NBCUniversal's affiliate fees, the best example of content and distribution leverage, have grown at a slower rate than the cable net universe," Holdulik wrote. "If the deal is not approved, we believe Time Warner's unique combination of high quality assets and scale would likely make it a potential target of further industry consolidation."

Time Warner

Investors may want to consider the 15-year valuation of the company’s maximum price-sales ratio to determine if it is a buy. GuruFocus shows the stock price has been below the median.

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Time Warner has a price-earnings ratio of 14.27 versus a median of 20.82. It has a price-book ratio of 2.59 versus a median of 1.85 and a price-sales ratio of 2.39 versus a median of 1.85.

Time Warner's dividend yield is 1.69% and it has a dividend payout ratio of 0.24.

It has a market cap of $73.77 billion. It has an enterprise value of more than $95 billion.

GuruFocus reports it posted $31 billion in revenue for the trailing 12 months. Its 12-month trailing earnings per share is $6.63. The stock's 52-week range is $85.88 to $103.90 per share.

The Peter Lynch chart suggest the stock is slightly undervalued. The median is about $99 a share.

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Revenue growth is 4% over the last 10 years and operating income has grown by 12.6% in the last five years.

The company’s operating margin has been expanding over the past 10 years, another good sign.

GuruFocus ranks it 5 out of 10 in financial strength and 7 of 10 in profitability and growth.

In his letter to shareholders, David Einhorn (TradesPortfolio) emphasized a growth in company earnings during the merger process. Increases in subscriptions of HBO, for example, are aiding revenue growth. The company has suspended a buyback program during the merger, which was announced by AT&T in late 2016.

“We doubt the shares have much downside at the year-end price of $91.47,” he wrote.

In Tuesday afternoon trading, Time Warner shares were at $96.66 a share, down nearly 1%.

Value investors on board

Many value investors flocked to Time Warner stock after it took a dive last November, when the government announced its antitrust suit. At the time, Time Warner sold for $87.05 a share.

In the fourth quarter, top buys included Seth Klarman (Trades, Portfolio)’s grab for 8 million shares, which hold 7.35% of space in his portfolio. Einhorn’s Greenlight Capital accumulated 665,000 shares, which sit in 1% portfolio space.

In a fourth-quarter letter to shareholders, Einhorn explained his new position. “Greenlight feels the government has a weak anti-trust case but even if they somehow win, shares are still cheap and the company has strategic options," he wrote.

Greenlight purchased Time Warner at $89.72 a share, according to his letter.

Einhorn and Klarman were among the six gurus who loaded up on shares of the owner of HBO, CNN and TNT in the last months of the year. Others included David Abrams (Trades, Portfolio), Stanley Druckenmiller (Trades, Portfolio), Andreas Halvorsen (Trades, Portfolio) and John Hussman (Trades, Portfolio).

Just under a dozen gurus sold some Time Warner stock, but still held on to older positions. Daniel Loeb (Trades, Portfolio) reduced his exposure but held on to 2 million shares. Mario Gabelli (Trades, Portfolio) dropped 15% of shares but held on to 1.7 million shares. The guru has gained 13% since he began buying shares in the first quarter of 2015.

Only one guru, the T Rowe Price Equity Income Fund (Trades, Portfolio), sold out of Time Warner in the fourth quarter of 2017.

In the last three months, Time Warner shares have climbed 5% to $92.63 a share.

On Tuesday, shares of AT&T were at $37.44, slightly up 0.2%.


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