However, considering that the stock has already risen more than 50% over the past twelve months, should investors hop on or wait for a pullback?
A strong second quarter
For its second quarter, Time Warner Inc (NYSE:TWX)’s earnings rose 46% to $0.83 per share, beating the consensus estimate by $0.08. Adjusted earnings nearly doubled from $0.42 to $0.81 per share. Revenue climbed 10% year-on-year to $7.4 billion, topping the $7.1 billion that analysts had expected.
By comparison, The Walt Disney Company (NYSE:DIS) earnings rose 2% from the prior year quarter as its revenue increased 4%. Disney met Wall Street forecasts on earnings, but missed on revenue.
Meanwhile, Twenty-First Century Fox Inc (NASDAQ:FOX), which separated from News Corp in June, reported a quarterly loss of $0.16 per share, an improvement from a loss of $0.64 per share last year. Fox’s revenue rose 16% from the prior year quarter.
Film and television are the engines for future growth
Revenue at Time Warner Inc (NYSE:TWX)’s Network division, which includes Turner Broadcasting and HBO, climbed 7% to $3.8 billion, accounting for over half of the company’s top line. Subscription, advertising, and content revenue rose 4%, 11%, and 5%, respectively. The segment’s operating income rose 13% to $1.3 billion. Strong growth at Turner Broadcasting was attributed to the NBA Playoffs and the 2013 NCAA tournament, which aired on TNT and TBS.
Revenue at Time Warner Inc (NYSE:TWX)’s Film and TV Entertainment segment, Warner Brothers, rose 13% to $2.9 billion, thanks to the robust box office performance of Man of Steel, The Hangover Part III, and The Great Gatsby. An increase in international television syndication and higher subscription revenue from video on demand offset a decline in domestic television licensing revenue. Operating income at the division rose 34% to $184 million.
Mightier than Mickey
Time Warner Inc (NYSE:TWX)’s strong growth across its television and movie segments notably outpaced both Disney and Fox last quarter.
The Walt Disney Company (NYSE:DIS)’s Media Networks segment, which includes ESPN, A&E, the Disney Channels, and ABC, reported a 5% increase in revenue to $5.3 billion, while operating income rose 8% to $2.3 billion. Disney struggled with a decline in program sales, lower advertising revenue, and higher prime time programming costs during the quarter.
The Walt Disney Company (NYSE:DIS)’s Studio Entertainment segment, which gained a lot of attention with its blockbuster Marvel releases, lost some of that magic with The Lone Ranger, which is expected to cause a loss between $160 million to $190 million in the fourth quarter. Total revenue at the segment declined 2% to $1.6 billion, as operating income plunged 36% to $201 million.
Luckily for Disney, robust gains at its theme parks and resorts helped offset those losses.
More focused than Murdoch
Twenty-First Century Fox Inc (NASDAQ:FOX), which retains News Corp’s TV and Film segments, also posted mixed numbers across the board. Fox’s cable network segment reported a 16% gain in revenue and a 25% surge in operating income before depreciation and amortization, fueled by higher fees from pay-TV operators and unexpected benefits from currency fluctuations. However, Fox’s growth is lopsided, with much stronger growth in its cable networks being offset by weaker results from its broadcast TV and film segments.
Twenty-First Century Fox Inc (NASDAQ:FOX)’s international TV networks, which include STAR and Fox Sports Latin America, reported a 41% year-on-year increase in affiliate fees. The company also expects Fox Sports 1, its new global premium sports channel, to take on Disney’s ESPN and boost its international revenue when it launches later this month.
Twenty-First Century Fox Inc (NASDAQ:FOX)’s TV segment, which includes the Fox broadcast network, fared much worse than its cable operations, reporting a 9% drop in operating income and 7% decline in revenue, dragged down by declining ratings from its aging American Idol franchise.
Twenty-First Century Fox Inc (NASDAQ:FOX)’s Filmed Entertainment division reported a 3% increase in revenue, but operating income declined 16%. Although Fox’s split from News Corp looks promising, the company will have to rearrange its businesses a bit before it can hold its own against Time Warner Inc (NYSE:TWX) and Disney.
Pushing print media aside
Just as News Corp separated its print media business from its media one, Time Warner is spinning off Time Inc. magazine into a separate, publicly traded company by 2014. Time Warner had previously negotiated with publishing giant Meredith Corporation to jointly create a new magazine company, but those talks eventually ended.
Time Inc., which houses its namesake magazine, Sports Illustrated, People, Fortune, Life, and Entertainment Weekly, is still the company’s worst-performing division, reporting a 3% year-on-year decline in revenue due to a 7% slide in subscription revenue and 5% drop in advertising revenue. However, operating income rose 26% to $124 million due to reduced expenses during the quarter.
The eventual spin off will be similar to Time Warner’s separation from AOL and Time Warner Cable in 2009, and the strategy is more of the same — to slim down the business to its best performing segments in an effort to pursue stronger top and bottom line growth across the board.
A Foolish final thought
With a forward P/E of 15, Time Warner Inc (NYSE:TWX) is still cheaper than Disney and Fox, which respectively trade at 17 and 20 times forward earnings. In addition, Time Warner’s TV and film franchises, which include Game of Thrones, The Hobbit, and the upcoming DC comics films, should remain strong over the next few years. Its broadcast rights to NBA and NCAA games should also help it remain competitive with Disney’s ESPN and Twenty-First Century Fox Inc (NASDAQ:FOX)’s Fox Sports 1, albeit only in the domestic market.
In conclusion, Time Warner’s recent success is a textbook example of what a company can do when it realizes that bigger is not always better. Today’s Time Warner is a far cry from the monstrous conglomerate that tried to take over the entire industry a decade ago, and it is now growing at a much faster rate as a result.
The article This Media Company Is Leaner and Meaner Than Ever originally appeared on Fool.com and is written by Leo Sun.
Leo Sun owns shares of Walt Disney. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Leo is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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