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Time Warner Beats Analysts Expectations, Raising Future Outlook

Time Warner (NYSE:TWX) posted its third quarter results for the year ending 2014. The company reported a 3.32% increase in its revenues on the back of growth in subscriptions from Turner, Home Box Office and Warner Bros. Revenues for the quarter amounted to $6.243 billion compared to revenues of $6.042 billion in the third quarter of last year. Despite this increase in revenues, the company lagged behind industry average of 9.4%. Turner's revenues rose by 4.6% during the quarter, and amounted to $2.446 billion. Higher international growth and higher domestic rates were the primary drivers of revenue growth for this segment. Home Box Office and Warner Bros revenues rose by 9.95% and 3%, amounting to $1.304 billion and $2.775 billion respectively. These increases in revenues were partially offset by a 60% increase in intersegment eliminations, which were recognized at $282 million, up from $176 million in the previous year.

Adjusted operating income for the company headed south during the third quarter and declined sharply by 37.5% during the quarter. Turner's operating income fell from $971 million in 2013 to $350 million; nearly 64% lower. This drop indicated that the increase in revenues were not able to trickle down to bottom lines as the company incurred higher restructuring and severance costs and higher programming costs as well. Home Box Office operating income amounted to $380 million; 4.3% lower as a result of higher programming and distribution costs, while Warner Bros operating income amounted to $241 million; 20% lower over the previous year's results. Corporate losses swelled from $99 million in the corresponding quarter last year to $114 million in the recently concluded quarter.

Income from operations amounted to $966 million relative to $958 million earned in the previous year. This translated into earnings of $1.11 per share; up by 8.8% over last year's results. Adjusted earnings per share amounted to $1.22 for the quarter, up by 34% relative to the third quarter last year.

Despite the increase in revenues not translating into bottom line growth during the quarter, Time Warner managed to beat analysts' estimates, who were expecting earnings per share of $0.94 for the quarter, and revenues of nearly $6.16 billion by the company. The subscription growth in HBO and Turner pushed the company forward to announce better than expected results for the recently concluded quarter.

Given its better than expected results for the quarter, Time Warner has revised its future outlook upward. Warner now expects high teen percentage growth in its earnings of $3.51 per share announced during the last year. This is an improvement from the previous low teen rise expected in the earnings for the current year.

Merger with Comcast Corp

According to news reports, Time Warner's merger with Comcast Corp is not only on schedule but is full speed ahead despite some concerns regarding the deal. The completion of this deal would mark the creation of the largest cable internet provider in the US. Investors however remained disgruntled as this deal is likely to affect Time Warner negatively, following President Barack Obama's statement regarding tighter regulation of internet service providers in the country. If regulators do implement the net neutrality principal ahead of this statement of the President, the merger deal could find a few dark clouds parading right behind it to rain on its success.

Conclusion

Time Warner remains dedicated to return value to shareholders through the implementation of its share repurchase program. From January 2014 till October 2014, the company had successfully repurchased 69 million shares for nearly $4.9 billion. In June, the directors of the company had authorized the repurchase of another repurchase program worth $5 billion. At October 31, 2014, funds worth $5.1 billion were available for repurchases.

This quarter was another when Time Warner was able to show its resilience in successful execution of its initiatives, along with strong quarterly results. Time Warner has convinced many investors that it not only has the strong earnings and cash flow profile to support its growth in the future, but also has the potential to return value to its stockholders, as shown by its raised future outlook and share repurchase program. That being said, the business is definitely one that long term investors should keep an eye out for.

Currently sitting at nearly $78 per share, Time Warner's stocks have risen by nearly 21% in value year to date. But there is no denying the fact that share prices have remained increasingly volatile during the past 52 weeks, coming in at a low of $58.22 and a high of $88.13. Analysts' project share prices at $89.19 over the course of the next 12 months. Trading at 17.28 times its earnings, the shares also offer investors a dividend yield of 1.60%, which might not be sufficient to satisfy the appetite of investors seeking steady streams of income from their investment.

The investment in Time Warner's stocks could be considered a solid one if its sales growth is taken into consideration. It must be understood that the declines in operating income were mostly due to the company's investment in strengthening its fundamentals in the television market, and not as a result of any inefficiencies. That being said, investors who would like to cash out of their investments would find share price jumps and opportunistic time to unload their portfolio, whereas those who are looking for long term gains would find the share an worthy investment opportunity in the next few years.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.