Thursday, September 10, 2009

Time Warner Inc. (NYSE:TWX): Everybody Loves TWX!

Time Warner Inc. (NYSE:TWX) is getting positive comments from left and right this morning:

- Goldman Sachs is raising coverage view on the Entertainment sector to Attractive and TWX to Conviction Buy from Neutral:

Raising coverage view to Attractive
We raise our coverage view on the Entertainment sector to Attractive from a Neutral view. A stronger-than-anticipated rebound in national advertising – a primary driver of fundamentals and sentiment across the group – is the single most important factor in our updated outlook. We acknowledge what we think will be continued weak consumer spending and local advertising trends but think these will be more than offset by rebounding national advertising, stable affiliate fee growth and solid content trends as secular disintermediation risk remains distant. Also, we view valuations as attractive relative to historical levels and other market sectors.

Source of opportunity
We are adding Time Warner to the Americas Conviction Buy list from Neutral driven by upside from a stronger-than-expected national ad rebound and raising our 2010/2011 EPS estimates by 7%/5 %. We see about 20% upside to our new $33.50 (from $25.50) price target and think corporate profit growth is likely to fuel a rally in national ads by 2Q10 at the latest, displacing direct response squatters and leading to 20% EPS growth in 2010 ex-AOL. We forecast Cable Network revenue/OIBDA to grow +7%/13% in 2010. This segment accounts for 75% of OIBDA ex-AOL but over 100% of expected 2010 growth, while our estimates allow for upside from Film and Publishing outperformance.

We believe Time Warner’s leading cable network properties are best positioned to outperform expectations icapturing a stronger than expected rebound in national advertising. TWX only receives about 25% of its revenue from ads, but it is all sourced from national brand accounts and represents about 33% of operating income. The return of higher price point advertisers should squeeze out the direct response filler inventory that buffeted the 2008-2009 ad slump and drive above-peer growth. The pending AOL spin renders about 75% of EBITDA sourced from branded cable networks, second only to Viacom in exposure to our favored media asset class on a mix basis, but greater in absolute revenue exposure. With about $2.5+bn in annual FCF, Time Warner can support its 2.7% dividend yield and $1.5bn in annual buybacks (about 6%-8% of outstanding shares) while preserving $5bn in cash for strategic assets or shareholder initiatives.

Our $33.50 6-m price target is based on 15x 2010E EPS ex-AOL of about $2.10, plus $2/share for AOL, a target multiple matching that for DIS. We are raising it due to higher national ad estimates and higher target multiple.

- WSJ has an article this morning titled "Comcast Could Tie Up More Cable Nationwide":

A federal appeals court ruled on Aug. 28 in favor of Comcast's and the cable industry's request for the elimination of ownership limits. No longer is any one company restricted to reaching 30% of TV subscribers. Yet as Comcast Chief Operating Officer Steve Burke said on Wednesday, while Comcast would consider an attractively priced cable purchase, "I don't think we wake up every morning saying 'how do we get bigger in cable.'"


The company best positioned to lead consolidation would be Comcast, as it already serves 23% of TV households that pay for TV, based on Comcast and Nielsen data. It could start by buying newly independent Time Warner Cable.

Would such a deal pass antitrust scrutiny, even absent the ownership cap? There is a good chance, say several antitrust lawyers. A major focus of antitrust law is whether a merger reduces competition in a way that could raise prices or otherwise hurt consumers. As cable operators generally don't compete with one another, merging wouldn't cut competition.

- Citigroup is highlighting TWX as potential target for CMCSA:

Comcast and Time Warner Cable should merge — Seven benefits: 1) Robust cost synergies, 2) Maintains investment grade rating, 3) Counters escalating content costs, 4) Simplifies wireless strategy, 5) Limits bidding war for future cable assets, 6) Extends cost advantage over telco and DBS, 7) Counters telco-DBS M&A.

Cost synergies are large — Estimate the pro forma entity would capture $1.6 billion in programming cost savings and $1.1 billion in other cost savings. Net present value of synergies around $11-12 billion, a significant portion of Time Warner Cable’s current market capitalization.

Regulatory hurdles may be low — Pro forma entity controls just 37% of pay TV market. Given nascent level of telco video subs, this may fall over time. Monopsony concerns limited by programming costs which still rose at 2-3x inflation for two largest cable firms between 2007 and 2008.

FCC concessions possible — Pro forma entity could help current administration reach potential broadband goals by enabling all homes passed for broadband – via Clearwire - and offering lower cost broadband for low-income consumers.

Maintain Buy on Comcast and Time Warner Cable — We expect both stocks to trade higher on potential announcement. As such, maintain Buy rating at $20 price target on Comcast. Maintain Buy rating on Time Warner Cable; raising price target from $35 to $45.

Action: Wow! Is it full moon or something? It just cannot be a coincidence.

CMCSA/TWX note from Citigroup was one of the first things I saw this morning and I was ready to recommend TWX on that one alone.

Then I saw Goldman's upgrade.

And a moment later WSJ article on CMCSA and other cables.

Now I'm dying to see the open already to get as many shares of TWX as possible. It is usually not a big mover so probably it will be possible to get fills around $29.. which will be a bargain. This stock will see at least $30 today.

Please ring the bell already!

1 comment:

  1. That one doesn't seem to cooperate. Anyone got a good explanation for this muted reaction?
    What comes to my mind:
    * Market weak after the open - however it has recovered by now
    * Concerns that any deal would impossible due to anti-trust - but it should be doable now with less scrunity
    * If my memory serves me right, Citigroup has had this CMCSA-for-TWX idea already once or twice before and market is just ignoring it this time.