Time Warner (TWX - commentary - Cramer's Take) reported another mediocre quarter, even after adjusting for some items that caused the reported numbers to understate the results. Revenue grew just 2% and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) grew just 3%. The revenue figure matched estimates while the adjusted EBITDA is a bit ahead. EBITDA strength came from cost controls at AOL that kept the EBITDA decline to just 25%. The company also announced that it will fully separate Time Warner Cable (TWC - commentary - Cramer's Take), although no details were provided. Investors were expecting a final decision on Time Warner Cable, and I believe the weak action in the shares has more to do with this than the financial results.
I thought management was defensive and analysts skeptical, frustrated and even hostile on the call. For the stock, I think the current position of the analysts and investor community is bullish. We are in a give-up phase, and the stock sits at a multiyear low. Some good news lies ahead in terms of restructuring and a pickup in growth. Segment results in this quarter reveal some underlying strength for the two largest contributors to EBITDA -- Cable and Cable Networks. The pending split of Cable leaves open the question of whether value will be conferred to Time Warner shareholders and in what manner, so right now, investors won't pay for the better results at Cable. Similarly, at Cable Networks, heavy program investments are restricting margins, so the strength in ratings and advertising is not flowing through and thus going unrewarded.
With Cable having its own currency already and now showing some improvement in subscriber metrics, I think that AOL remains the biggest obstacle to a higher stock price. Any transaction involving AOL that creates clear value in the $12 billion to $15 billion range would significantly help Time Warner's stock price if it meant AOL was separated from the company. The Yahoo! (YHOO - commentary - Cramer's Take) situation cries out for Time Warner management to get involved.
Media VIA Preview: Comedy Central Looks Strong 4/29/2008 6:30 PM EDT The Daily Show and the Colbert Report, along with staple cartoons from Nickelodeon, should prove solid earners.
Media Dreamworks' Earnings: Good Show 4/29/2008 5:31 PM EDT The company beats and has upside, and its stock's value is tied closely to its movie releases.
Media TWX Preview: Expect More Mediocrity 4/29/2008 12:01 PM EDT Analysts expect the company to produce earnings of 23 cents per share on $11.39 billion in revenue.
At the time of publication, Birenberg was long Time Warner in a single client account, although holdings can change at any time.Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.
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