Time Warner's Stake In Hulu Likely A Hedge Against Declining Cable Subscriptions

Time Warner Inc TWX reported mixed 2Q results, but raised its full-year guidance. Argus’s Joseph Bonner maintained a Buy rating on the company, saying that its recently announced acquisition of a 10 percent stake in Hulu was likely a hedge against an expected downturn in cable subscribers.

Time Warner reported its 2Q EPS ahead of the consensus estimate by $0.12. Revenue declined 5.4 percent y/y to $6.95 billion, due to FX headwinds and a decline at the Warner Bros. studio, which offset growth at The Turner and HBO segments. GAAP EPS rose to $1.20 in 2Q16, from $1.16 in 2Q15. Time Warner raised its EPS guidance for 2016 from $5.30-$5.40 to $5.35-$5.45.

The Hulu Hedge

Time Warner announced plans to purchase a 10 percent stake in subscription video-on-demand distributor Hulu for $583 million in cash.

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The announcement highlights Time Warner’s attempts to aggressively partner with emerging digital distributors, analyst Joseph Bonner mentioned. He added, “We see these moves as both an opportunity to expand its distribution and as a hedge against what may be a secular decline in cable subscribers.”

As new SVOD and OTT services enter the US and international markets, there would be increased demand for “the kind of premium branded video content produced by Time Warner,” the analyst commented.

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