Time Warner To Rise In Prestige, As Dark Knight Does Big Business

| About: Time Warner (TWX)
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Time Warner (TWX) owns cable networks, a movie studio and a magazine publishing business. 42% of Time Warner's revenues came from the Filmed Entertainment segment (Warner Bros. Entertainment Inc.) in the last quarter. Warner Bros.' revenues rose 7% in the first quarter, contributing to TWX's revenue increase of 4.4%, to $6.98 billion, while analysts were expecting revenues of $6.8 billion. The company posted EPS of 59 cents/share, 3 cents above analyst estimates. Owing to the performance of the Dark Knight Rises and the future line up of films (coupled with consumer product licensing tied to films) and TV shows for Warner Bros., we give TWX a buy rating.

This year marked another feat by Warner Bros., when it reached $1 billion at the International Box Office in less than five months. This was the quickest that the studio has ever reached the figure (in 2010 it took 10 more days); this year also constitutes the twelfth consecutive year when this mark has been crossed. The success can be attributable to the following titles: Sherlock Holmes: A Game of Shadows, Journey 2: The Mysterious Island, Wrath of the Titans, and Dark Shadows. WB International has been at the forefront for years, being the market leader for 6 out of the last eleven years.

The Dark Knight Rises, the latest and final installment of the $3.2 billion grossing Batman Dark Knight Series opened in theaters on July 20, 2012. It has grossed $289 million in Canada and the U.S. so far ($25 million less than the previous batman film (Dark Knight) in the same time), and it's opening grossed $160 million (compared to $158 million by the Dark Knight), although it was overshadowed by news of the Colorado shooting incident. Following the third biggest opening of all time, it added $64 million domestically this weekend (compared to $75 million by The Dark Knight) with sales slowing down and competition from coverage of the Olympics. Although the latest installment is lagging behind its predecessor in the American market, it can surpass the latter at the International Box Office. The international figure stands at $248.2 million at present, compared to The Dark Knight's $468.6 million (47% of total gross) in 2008. Previously, The Dark Knight, released on July 18, 2008 in the Unites States, grossed over $1 billion at the box office, making it the twelfth highest grossing film of all time.

Warner Bros. is expected to get all of the opening weekend gross for The Dark Knight Rises. This reflects the high expectations attached with the film. Disney (DIS), the distributor for the Avengers, got 33.7% of the opening weekend gross only. As time passes, the share of the gross shifts in favor of exhibitors/theatre chains.

The popularity of the Batman series in the past, as well as that of the latest installment, ensures that the consumer products revenues would be rising too. The Warner Bros Consumer Products (WBCP) announced on July 19th the lineup of licensees, including Mattel, The LEGO Group, Hallmark, Converse, Kinetix and Rubie's Costume Company; the products will range from toys, collectibles, games and costumes, to domestic décor, accessories, apparels and party goods.

Television licensing of movies and distribution of DVD and Blu-Rays are other sources of revenue. With popular films like the Dark Knight Rises under the banner, these revenues are expected to rise.

In the month following The Dark Knight's release in 2008, TWX's shares were up 17%, although it reported a 29% drop in Q2 earnings that year. Below is a graph showing the trend:

Since the opening of The Dark Knight Rises, the performance of the stock has been mixed, primarily due to concerns of the shooting incidents denting the revenues from the movie. But since July 24, the stock is up 4%.

Moreover, TWX is set to announce its earnings for Q22012 tomorrow, August 1.

With films like Peter Jackson's The Hobbit: An Unexpected Journey (related to the $2.9 billion grossing Lord of the Rings trilogy) and Ben Affleck's Argo, TWX is set to benefit from the Film Entertainment segment of its business. The Warner Bros. Television Group and CW network isn't far behind, with many of its famous series like the Big Bang Theory, Supernatural and The Vampire Diaries returning this year. HBO's Games of Thrones is another well received series from Time Warner.

This is a good time to buy and benefit from the upcoming prospects for TWX's Warner Bros. Entertainment Inc. The company has a long term earnings growth rate of 12%.

The net profit margin of TWX was 8.3% last quarter (down from 9.7% in Q12011 because of $35 million in impairment charges from the cancellation of an HBO series and a charge of $52 million for shutting an Indian network). This is in comparison with Disney's 12.7% and News Corps' (NWSA) 11.9%.

It is trading at a forward P/E of 11x compared to NWSA's 13.7x and DIS' 14x.

It has a respectable dividend yield of 2.7% compared to NWSA's 0.8% and DIS' 1.2%. The company also repurchases its stock. It repurchased shares worth $889 million till April 27 in the first quarter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.