On Wednesday, entertainment giant Time Warner (TWX) beat Wall Street quarterly estimates and offered an improved outlook for the full year. Instead of celebrating these strong results, however, investors sent shares sliding by more than 1%.
Still, this stock offers a good opportunity for investors.
The reason why investors sold shares is Time Warner's planned acquisition by AT&T. Last month, AT&T announced that it would be purchasing Time Warner for $85.4 billion, a deal that values the entertainment company at $107.50 per share.
AT&T is the country's second-largest wireless telecommunications provider behind Verizon. And it also owns cable satellite company DirecTV. With thousands of Americans "cutting the cord" on cable and watching films and programs online with streaming services such as Netflix and Amazon Video, however, the company needs video content to compete.
The deal to purchase Time Warner, which has produced hit entertainment for decades, would be mutually beneficial. After all, Time Warner needs new platforms for the programs and films that it produces. On Wednesday's earnings call, CEO Jeff Bewkes remarked that he expects the deal to close by the end of 2017, "if not sooner."
Investors haven't been all that thrilled, however, mainly because the purchase is expected to draw intense scrutiny from federal regulators. The deal will have to pass the Department of Justice, but there has been concern that it could also be challenged by the Federal Communications Commission. However, executives at Time Warner have said that the companies would sell any licenses that caused a hurdle for the deal.
However, Time Warner is still a strong company in its own right, as attested by Wednesday's earnings release. And there's plenty for investors to look forward to.
For the quarter, net income rose to $1.47 billion, or $1.83 a share, from $1.04 billion, or $1.26 per share, in the year-earlier quarter. And revenue rose 9.2% to $7.2 billion, beating Wall Street's forecast of $6.98 billion.
The company's biggest division, Warner Bros., saw revenue rise by 6.7%, to $3.4 billion, thanks to the release of several hit movies. Revenue at cable network HBO, which produces the TV blockbuster Game of Thrones, rose by 4% in the third quarter.
On the back of these strong quarterly results, Time Warner raised its full-year EPS expectation to $5.45-$5.55 from the previous range of $5.35-$5.45.
Although the sale to AT&T may take a while to finalize, and although the journey may be rocky, this is still a great stock for investors looking to profit from big entertainment companies. Look for any dips as great opportunities to purchase shares of Time Warner.
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