(By Mani) Media conglomerate Time Warner, Inc.
) would deliver stable and predictable earnings, helped by upcoming affiliate fee cycle starting in 2014, and its lesser exposure to advertising versus peers makes the stock a defensive play.
Time Warner, which owns popular channels such as CNN, TNT, TBS, has built a notable sports franchise with Turner Sports – a move that would reap rich dividends in 2012. Time Warner has NBA, NCAA men's basketball championship, Major League Baseball playoffs, Nascar in its kitty.
The surging popularity of sports programming should give more bargaining power for Time Warner with cable providers in deciding the affiliate fee, and in turn would boost networking revenue.
"We expect about 45% of Turner's 101 million U.S. affiliate fee subscriber base to be renegotiated in 2014, a much smaller 5% to be renegotiated in 2015, followed by the remaining 50% in 2016," UBS analyst John Janedis said in a client note.
Meanwhile, after almost three years of underperformance, Time Warner's network advertising estimated 7 percent growth to be more in-line with peers starting in the fourth quarter of 2012.
"We expect Turner networks will benefit from 1) 7% CPM growth in the most recent upfront, at the high end of its peer group, 2) improved ratings on its key networks, and 3) a significant increase in NBA games in 4Q12 (20 this season vs. only 5 last season)," Janedis said.
Still, it is important to note that if there is any further slowing in the ad market, Time Warner is well positioned given its relatively small advertising exposure versus peers. Advertising accounts for about 20 percent of Time Warner's total revenue versus a much greater 40 percent average for the group.
On the ratings front, investors are concerned with several cancellations of shows on TNT, and the negative impact on ratings, and, therefore, revenue. However, the solid ratings at TBS allowed Time Warner to clean up some of the audience deficiency units from TNT on TBS, helping to prevent further pressure on advertising.
Over the past few months, the premieres of Dallas, Perception and Major Crimes all performed well, with both Dallas and Perception renewed for a second season and Major Crimes appearing to be well on its way after a handful of episodes. Over at TBS, both Men at Work and Sullivan & Son were also renewed for a second season.
Of its larger-cap entertainment company peer group, Time Warner has the largest TV production studio embedded within its film business. Growth in the TV business is significantly outpacing the film business, and helping to offset some of the secular challenges in the segment.
"Over the five years ending in 2012, we expect TV revenues will have grown at a 5% CAGR vs. the 2% decline for film revenue, and TV production revenue should account for 39% of the film segment's revenue this year, up from 33% in 2007," Janedis wrote.
Over the past several years, TV revenue growth has benefitted from increasing international syndication demand, increased traditional U.S. syndication demand, and revenue from new subscription video on demand (SVOD) outlets, an opportunity that is still largely untapped for Time Warner. Last month, Time Warner disclosed that it's annual SVOD revenue run rate is $250 million.
"We know the TV revenue is growing faster and carries a higher margin than film, which has been margin accretive over time. As a result of the lack of disclosure, though, we think Time Warner's TV business is under appreciated by the Street," Janedis noted.
Meanwhile, the return of capital via dividend and share repurchase program, could increase and further benefit the stock. Time Warner has returned almost $13.7 billion to shareholders over the past 4.5 years through dividends and share repurchases.
"We forecast another $1.1 billion in share repurchase activity in the second half of this year, bringing the full year 2012 repurchase to $2.4 billion. And, we expect another $2.3-2.5B in share repurchases in each of the next four years, which equates to about 6-7% of the company's current market cap annually," Janedis added.