Time Warner Beats, Enhances Return - Analyst Blog

Time Warner Inc. (TWX), the diversified media conglomerate, posted better-than-expected fourth-quarter 2010 results on the heels of an increase in advertising and subscription revenues. The company also hiked its quarterly dividend and boosted its share repurchase program.

The shares of Time Warner rose 2.6% or 84 cents to $33.15 in pre-market trading.

The quarterly earnings of 67 cents a share outdid the Zacks Consensus Estimate of 62 cents, and rose 22% from 55 cents earned in the prior-year quarter. On a reported basis, including one-time items, earnings came in at 68 cents a share, up 28% from 53 cents delivered in the year-ago quarter.

Buoyed by the strong quarterly performance, Time Warner now expects fiscal 2011 earnings to increase in the low teens. Following this, a positive sentiment may be palpable among the analysts covering the stock, and we could witness a rise in the Zacks Consensus Estimates in the coming days. The current Zacks Consensus Estimate for fiscal 2011 is $2.62.

Time Warner's total revenue in the quarter grew 8% to $7,812 million from the previous year-quarter, and handily beat the Zacks Consensus Estimate of $7,477 million. Adjusted operating income during the quarter logged a growth of 14% to reach $1,425 million.

Segment Details

Networks division's revenue, which includes Turner Broadcasting and HBO, jumped 14% to $3,348 million, driven by growth of 9% in subscription revenue, 21% in advertising revenue and 25% in content revenue. Adjusted operating income for the segment climbed 20% to $904 million.

Time Warner's Filmed Entertainment segment revenue climbed 10% to $3,636 million driven by a rise in television license fees. Adjusted operating income for the division, which comprises Warner Brothers, dropped 5% to $416 million due to a fall in home video revenue and increase in theatrical print and advertising costs, which fully offset television license fees.

Publishing revenue tumbled 4% to $1,056 million, reflecting declines of 1% in advertising revenue, 7% in subscription revenue and 13% in other revenue. However, the segment's adjusted operating income surged 63% to $182 million from the prior-year quarter, principally due to lower restructuring expenses.

Other Financial Discussions

Time Warner ended fiscal 2010 with cash and cash equivalents of $3,663 million, long-term debt of $16,523 million, reflecting debt-to-capitalization ratio of approximately 33%, and shareholders' equity of $32,940 million, excluding non-controlling interest of $5 million.

During the quarter, Time Warner generated free cash flow of $701 million and incurred capital expenditures of $294 million. For the full year, free cash flow was $2,698 million and capital expenditures were $631 million.

During fiscal 2010, the company generated $3,314 million of cash from operations and received $5,243 million from borrowings. Time Warner also utilized $4,910 million of cash toward debt repayment, $2,016 million toward share buybacks, and $971 million toward dividend payments.

Time Warner also raised its quarterly dividend by 11% to 23.5 cents and increased its share repurchase authorization to $5 billion from the $1 billion remaining at its disposal as of December 31, 2010. The increased dividend will be paid on March 15, 2011 to shareholders of record as of February 28, 2011.

Currently, we have a long-term Neutral rating on the stock. Moreover, Time Warner, which competes with News Corporation (NWSA) and Walt Disney Company (DIS), holds a Zacks #3 Rank, which translates into a short-term ‘Hold' rating, and corroborates our long-term recommendation.