Last close: $35.07
Time Warner is a media and entertainment company involved in networks (e.g. HBO and Cinemax), film entertainment (e.g. Warner Bros.) and publishing (e.g. Time magazine). The company generates revenue from subscriptions (e.g. for pay television), advertising and content production (e.g. Harry Potter films). On a fully diluted basis, Time Warner’s market capitalization is $40.2 Bn and its enterprise value is $53.1 Bn.
Time Warner is a strong and stable business.
- Content ownership provides a natural “moat” to the company
- It has a consistent track record of generating cash flow, despite cyclical advertising exposure
- $8.6 Bn in unlevered free cash flow on average since 2003 ($4.7-$13.0 Bn range);
- $8.8 Bn in annualized unlevered free cash flow on average since Q4 2005; and
- $9.3 Bn in average rolling LTM unlevered free cash flow since Q3 2006
- The bond market is pricing all of Time Warner’s outstanding publicly traded debt above par
- The company could pay off all outstanding debt as of 31 December 2010 within 1.5 years, using available cash and based on historical through cycle cash generation. Incidentally, the company could also pay off all liabilities - including all outstanding debt - as of 31 December 2010 within 4 years, on the same basis
Time Warner’s equity is attractively priced, despite a 21% rally since July 2010 (which was in line with the market).
- The company is trading on a cash flow yield of more than 17%, based on cash generation both through the cycle and in the latest twelve months. For reference, the cash flow yield is more than 9% based on cash generation in the worst twelve month period since 2005 (LTM ending December 2008, which is understandable since this was the quarter after Lehman Brothers went bust)
- Current valuation implies that Time Warner’s cash generation will decline c. 9% in perpetuity, which is undoubtedly a bold statement to accept
- Other valuation metrics also support the Time Warner’s relative undervaluation compared to the company’s own trading history and comparable companies
- Risk-reward is attractive as downside is acceptably protected and upside is consumer spend and advertising driven, which are GDP linked. So, one is betting on (primarily US) GDP recovering for outperformance
- Outperformance vs. estimates over the last 9 quarters perhaps provides some comfort that a recovery is indeed underway
- The 2.7% dividend yield is an added sweetener
That’s all folks!
