Last quarter, famed hedge fund manager David Einhorn (Trades, Portfolio) bought 3,795,700 shares of Time Warner Inc (TWX, Financial). The company is trading at 18 times FY2015 consensus EPS and appears a value buy given its high earnings growth rate. Here's a look at the company in detail.
Business basics
Time Warner Inc. is a leading media and entertainment company. The company classifies its businesses into the following four reportable segments:
- Turner, consisting principally of cable networks and digital media properties;
- Home Box Office, consisting principally of premium pay television services domestically and premium pay and basic tier television services internationally;
- Warner Bros., consisting principally of feature film, television, home video and videogame production and distribution; and
- Time Inc., consisting principally of magazine publishing and related websites and operations.
Financial overview and analyst estimates
The company has posted impressive growth in the recent past and its EPS has grown from $3.00 in FY2012 to $4.31 in FY2014 (see table below).
Source: Gurufocus Value Screens
Last year, the company reported strong financial performance with solid revenue growth and 18% growth in adjusted EPS. The company's EPS forecast for the current fiscal year is $4.64 and next year is $5.77. According to the consensus estimates, its top line is expected to grow 3.90% current year and 6.80% next year. Out of 32 analysts covering the company, 25 are positive and have buy recommendations, and 7 have hold ratings.
Investment argument
Media business is undergoing a rapid change these days. While consumers appetite for high quality video content is increasing, there is a secular shift taking place towards on-demand consumption. Advertisers, on the other hand, are now expecting more use of data analytics and targeting. These challenges create both new challenges as well as opportuinities for the producers like Time Warner. The company seems to be adapting well to these changes and has posted high-teen adjusted EPS growth for the last six years.
The company is increasingly investing outside the traditional TV ecosystem to help ensure that consumers can access its content even if they don't have a conventional multichannel TV subscription. One of the notable example of it is the company's HBO OTT service which it is on track to launch later this year. The launch of this service will give Time Warner an opportuinity to reach broadband-only consumers and will reduce the friction of subscribing to HBO for multichannel subscribers thant don't currently have the service.
Going forward, the company is targeting adjusted EPS of between $4.60 to $4.70 per share in 2015. The company also plans to invest aggressively in content to accelerate revenue growth in 2016 and reach its target of $6 in EPS by FY2016. Time Warner is trading at 18 times FY2015 EPS. The company has a good tract record of EPS growth and Expects EPS growth in high teens till 2018. During FY2014, the company repurchased $5.5 billion in shares, and combined with dividend, returned $6.6 billion to shareholders. I believe the company is a good buy at current levels.
