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In our last article before Time Warner (NYSE:TWX) announced its 2Q2012 earnings, we had recommended investors buy TWX based on the impressive performance of the filmed entertainment part of its business (Warner Bros), which makes up almost half of TWX's revenues. The stock is up almost 14% since then. We believe that there is still some upside left in TWX, and therefore we reiterate our buy recommendation.

The company reaffirmed its full year 2012's adjusted EPS outlook of a low double digit growth over last year's EPS of $2.89. The company had met analyst expectations for EPS in 2Q2012, but had missed the revenue expectation by a small percentage (0.03%). The Networks segment (Turner Broadcasting and HBO) of the business was the best performing area in terms of revenue and operating income for TWX. The segment provides television services. Series like the Big Bang Theory and HBO's original series True Blood and Game of Thrones continue to be viewer favorites. HBO recently announced a new service (video distribution) in the Nordic regions, comprising of Finland, Demark, Norway and Sweden. Filmed entertainment's revenues declined by 8% YoY because last year saw the releases of big films like The Hangover Part 2, and the Home Entertainment release of Harry Potter and the Deathly Hallows Part 1. Television licensing revenues, however, did increase.

The total debt-to-equity ratio is 67%. TWX has $19.9 billion of debt and $2.47 billion in cash and cash equivalents. The interest coverage ratio is 4.7 times. The operating cash flow is $3.32 billion trailing twelve months. TWX has a borrowing capacity of $7.505 billion, which remains unused as at the end of the last quarter in June. Debt does not seem to be a matter of concern at present.

TWX's dividend yield is 2.35%, while the free cash flow yield is 3.8%, showing that dividends are sustainable. The last 3-year dividend growth rate is almost 8%.

The company also repurchases shares. Under the share repurchase program announced in January 2012, the company was authorized to repurchase $4 billion of stock. Around $1.5 billion of stock has been repurchased as at July 27, 2012. It still has $2.5 billion of that authorization left to repurchase shares from time to time.

TWX experienced some upgrades and downgrades over the last month. On August 12, Caris & Company downgraded the stock from above average to average because they believed that the stock was fairly valued now, while on September 4, UBS upgraded TWX from Neutral to Buy. UBS increased the target price from $39 to $50 citing upcoming affiliate fee cycle in 2014, significant returns on capital through its dividend and share repurchase program, improved programming, and because TWX makes a good defensive play with less exposure to advertising than its peers.

The forward P/E of TWX is 12x as compared to Disney (NYSE:DIS)'s 15x and News Corp's (NASDAQ:NWS) 12x. The 5-year average P/E multiple of TWX is 14x. Based on the forward P/E of 12x, average P/E of 14x and analyst consensus EPS estimates, the valuations come out to be:

The stock is setting a new 52-week high. The consensus target price is $50. We reiterate our buy recommendation for TWX based on its upside potential.

Source: Buy Time Warner For Dividends, Share Buybacks And Earnings Growth