Time Warner's Movie Catalogue Is An Overlooked Asset

Albert Fried & Company continues to believe Time Warner Inc TWX is cheap on both a relative and an absolute basis, especially its movie business. It maintains its Overweight rating and target price of $90, which implies a potential upside of 13.5 percent.

“We think TWX has two divisions which are poised to execute better than Wall Street expects, Turner and Warner Brothers. We also like HBO. Lastly, Warner’s Movie Catalogue is a hidden asset on the Time Warner Balance sheet in our view,” analyst Rich Tullo wrote in a note.

Tullo expects Time Warner revenue to be more than $28 billion in 2016, and operating income at $6.9 billion. The analyst noted that the company added about $2.8 billion to the top line in the four-year period (from 2012–2016) and added about $1.4 billion to operating income.

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“Thus we think TWX has nice operating leverage over the long term making about $0.50 cents on each incremental revenue dollar before taxes,” Tullo highlighted.

The year 2012 is considered as it is the year when OTT emerged as true mass market business owing to fast consumer adoption rates. Time Warner has managed to boost its top line by billion in the two-year period following the launch the US acceptance of OTT services.

Forward Growth

Meanwhile, Tullo noted that Time Warner’s next growth cycle will kick off in 2017 from the launch of 5G mobile and Time Warner benefits from its inclusion on new services from T-Mobile US Inc TMUS, AT&T Inc. T and HULU.

“We think the more ways people watch TWX’s content the more ways TWX benefits from new and existing business lines,” Tullo continued.

In addition, the analyst added that HULU is inexpensive based on the Time Warner purchase price and growth acceleration could unlock the value.

“Ultimately, we think TWX’s 10 percent HULU stake could be a low risk ($583 million relative to TWX’s $62 billion market Cap) high reward investment. By our calculation using a competing OTT operator has $13 billion content obligation as of June 30, 2016, the operator now has a roughly $59 billion true enterprise value or $668 per paid sub,” Tullo elaborated.

At $5.8 billion HULU is being valued at roughly $485 per sub (or less) and the analyst predicts HULU has a better runway for growth.

Further, Time Warner has partnered with Amazon.com, Inc. AMZN Prime on content and with Tencent in China. The analyst pointed out Time Warner’s large IP properties — the Bleacher Report and CNN.com together amount to more than 100 million monthly users.

“We think TWX is in a position to benefit from the mobile affiliations and eliminate the middle man in other cases because by 2020 we do not think the #1 distributer of OTT data will be an MVPD it will be AT&T, Verizon Communications Inc. VZ or T-Mobile,” Tullo added.

At time of writing, shares of Time Warner gained 0.64 percent at $79.91.

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