TIME WARNER(NYSE:MOS)
NOVEMBER 7, 2013
Dec. 5, 2013
Zijian (Paddy) Gu, Zige (Z) He, Charalampos (Haris) Ntantanis
Agenda
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Company overview
Macroeconomic analysis
Industry Analysis
Equity market performance
Financial analysis
Valuation
Recommendation
Company Analysis
•
World’s Third Largest Media Conglomerate
•
Well Known Brand: CNN,TBS, TNT,Time Inc.
•
70% of Revenue comes from U.S.
•
Three business segments: Networks , Filmed Entertainment , and Publishing
•
Adjusted Operating Income increased 8% to $1.7 billion
•
Adjusted EPS rose 20%
Source: Hoover’s - Time Warner Inc, 2012 10 - K P46, 2013 Q3 CFO Earning Presentation P1,P10
Company Analysis
Film and TV Entertainment
•
12.018B in Revenue - 39% of Total Revenue
•
Produce and distribute feature films, television, video games and other programming
•
Feature Films and Television- Warner Bros
•
Home Entertainment - Warner Home Video, Warner Bros. Digital Distribution, Warner Bros. Interactive
Entertainment
•
Revenue from Subscription grow at 30% and 36% for 2011 and 2012 accordingly
•
Revenue change for the segment decreased from 9% in 2011 to (5%) in 2012
•
mainly due to decrease in advertising revenue and content revenue
Source: Mergent - Time Warner Inc, 2012 10 - K P47,57
Company Analysis
Network Division:
•
14.204B in Revenue - 50% of Company’s Total Revenue
•
Turner Networks
•
•
TBS, TNT, Cartoon Network, truTV, Turner
Home Box Office Services
•
114,000,000 worldwide subscribers( 41,000,000 domestic pay subscribers and
73,000,000 international pay and basic tier television service subscribers )
•
Revenue growth at an average of 6% per year from 2010 to 2012
•
Operating Income growth at an average of 6% per year from 2010 to 2012
•
For year end 2012, Company recognized 208 Million of Charges relative to the TNT Turkey Shutdowns.
•
174 million related to asset impairments of long-lived assets, inventories and goodwill
Source: Mergent - Time Warner Inc, 2012 10 - K P46, 54
Company Analysis
Publishing
•
3.436B - 12% of Total Revenue
• Time Inc.
•
magazine publisher
•
operates a number of websites, book publishing business and marketing businesses.
•
Operating Income has a change of (25%) in 2012
•
Subscription and Advertising Revenue both decreased by 5% in 2012
•
11 Million trade name impairment
•
Incurred 60 million charges related to restructuring cost in first quarter 2013
Source: Mergent - Time Warner Inc, 2012 10 - K P46,P61
Company Analysis
International Expansion will be the focus for Network Segment
Expect Subscriptions revenue to grow at constant rate
Transforming into a pure global entertainment company, Keep their Most profitable businesses
and get rid off others
•
March 2009 - announced that it would spin off Time Warner Cable
•
May 28, 2009 - announced that it would spin off AOL
•
March 2013 - announced that it would spin off Time. Inc
Source: Capital IQ - Time Warner Inc.
Company Analysis - Risk Factors
Source: 10-K 2012 P24 - P27
Company Analysis-SWOT
Source: OneSource - Time Warner Inc.
Recent Financial Information
Data from: Capital IQ, Financials, TimeWarner Inc.
Recent Financial Information
Data from: Capital IQ, Financials, TimeWarner Inc.
Revenues Breakdown
by segment
Data from: Capital IQ, Financials, TimeWarner Inc.
Marco Analysis - Key Factors
• TV Industry - Increase in Disposable Income drives Advertising Revenue
• Publishing Industry – Increase Discretionary Purchase
• Movie and Video Production Industry – Increase Discretionary Purchase
Source: IBIS World
Marco Analysis - Key Factors
Television Production Industry:
• Total advertising expenditure is expected to increase slowly until 2016
• The number of cable TV subscriptions is expected to decrease slowly in
2013
Source: IBIS World
Marco Analysis - Key Factors
Magazine & Periodical Publishing Industry:
• Growing number of ways for advertisers to market products
• Internet – only advertisement require lower production and distribution cost
• Printing Advertising Expenditure is expected to decrease
Source: IBIS World
Marco Analysis - Key Factors
Movie & Video Production Industry:
• Digital technology advancement increase potential opportunity for the industry
• lower consumer demand for feature films negatively affect this industry
• Increase interest rate will reduce producer’s ability to acquire capital
Source: IBIS World
Industry Analysis - Industry Performances
• Television Production Industry has the best performance forecast
• Going online has become the trend for all three industries
Source: IBIS World
Industry Analysis
Television
Production
Magazine &
Periodical
Publishing
Movie & Video
Production
Source: IBIS World
Television Production
• Contribution to GDP is increasing
• Number of Channel has increased
• Online TV program increase revenue
Movie & Video Production
• Digital technology increase competition
• Competition for talent drives revenue
down
Magazine & Periodical Publishing
• Huge decline in printing advertisement
• Advertising revenue has largely shift to
online competitors
Industry Analysis
• Similar players in the Movie and Video Production and the Television Production Industries
• Concentration is low in the Magazine and Periodical Publishing Industry but high in the other two
• Large corporations have high ability to minimize production risk
Source: IBIS World
Industry Analysis - Key Success Factor
Strong Brand Name
Establish positive perceptions
Skilled and Talented Workforce
Enable great product and strong brand
Cost Control
Meet contractual agreement
Adaptation to New Technology
Improve outcome and reduce cost
Source: IBIS World
Equity Performance
Source: Google Finance
Technical Analysis
Source: Yahoo finance
Financial Analysis
Liquidity Ratios
2008
2009
2010
2011
2012
Current Ratio
1.18
1.48
1.52
1.51
1.35
Quick Ratio
0.44
1.12
1.17
1.17
1.04
Cash Ratio
0.08
0.54
0.42
0.39
0.29
Gross Profit Margin
Operating Profit Margin
Net Margin
ROA
ROE (Book Value)
Debt/Assets
Debt/Equity
Interest Coverage
Profitability Ratios
2008
2009
2010
2011
2012
43.59% 43.93% 44.13% 43.70% 44.54%
-11.52% 17.61% 20.19% 20.04% 20.60%
-50.68%
9.76%
9.59% 9.96% 10.51%
-11.75%
3.77%
3.88% 4.26% 4.42%
-29.34%
7.34%
7.83% 9.63% 10.10%
Solvency Ratios
2008
0.17
0.43
(2.24)
2009
0.23
0.46
3.83
2010
0.25
0.50
4.61
2011
0.29
0.65
4.80
2012
0.28
0.64
4.72
Financial Analysis
A/R Turnover
Days Sales Outstanding
Inventory Turnover
Days Inventory on Hand
A/P Turnover
Days Payables Outstanding
Fixed Asset Turnover
Total Asset Turnover
EBIT/Tangible Assets
EBIT/EV
Activity Ratios
2008
2009
2010
2011
2012
4.05
4.96
4.68
4.35
4.02
90.09
73.62
77.94 83.99
90.88
7.56
7.88
8.14
8.56
8.07
48.31
46.29
44.81 42.63
45.24
2.29
1.82
1.92
2.10
2.01
159.71
200.97 189.87 173.96 181.93
6.44
6.41
6.94
7.31
7.29
0.23
0.39
0.40
0.43
0.42
Greenblat Ratios
2008
2009
(0.16)
0.19
(0.32)
0.33
2010
0.21
0.26
2011
0.22
0.23
2012
0.23
0.22
DuPont Analysis
Tax Burden
Interest Burden
Operating Profit Margin
Asset Turnover
Leverage
ROE
DuPont Analysis
2008
2009
304.71%
76.52%
144.45%
72.42%
-11.52%
17.61%
0.23
0.39
2.50
1.95
-29.34%
7.34%
2010
65.78%
72.20%
20.19%
0.40
2.02
7.83%
2011
66.10%
75.21%
20.04%
0.43
2.26
9.63%
2012
66.47%
76.75%
20.60%
0.42
2.29
10.10%
Cost of Capital
Weighted Average Cost of Capital
Share Price*
Shares Outstanding
(millions)
Market Value of Equity
Debt
CAPM
$65.44
904.72
$
59,204.88
Risk-Free Rate
Market Risk Premium
5-Year Beta
2.83%
6.00%
1.11
CAPM Cost of Equity
9.48%
$19,145.00
Percent Equity Weight
Percent Debt Weight
75.56%
24.44%
Cost of Debt
Cost of Equity
CAPM Cost of Equity
ROE
Cost of Equity
Tax Rate
Business Premium
WACC
6.84%
9.48% 30.00% Cost of Equity
8.73% 70.00% Weightings
8.95%
34.0%
2.0%
9.9%
*As of December the 4th
DCF Analysis
Time Warner Discounted Cash Flow Analysis ($ millions)
Net Income
Depreciation
Capital Expenditures
Changes in Net Working Capital
Less Increases in A/R
Less Increases in Inventories
Plus Increases in A/P
Free Cash Flow
Present Value
2013E
$2,697.69
$1,026.54
(709)
2014E
$3,519.10
$1,059.39
(763)
2015E
$3,631.71
$1,099.41
(804)
2016E
$3,751.56
$1,129.37
(846)
(13)
(71)
$474.02
$3,405.76
3,157
(237)
(68)
$273.38
3,784
3,252
(244)
(70)
$282.12
3,895
3,103
(260)
(75)
$300.25
4,000
2,954
Calculation of Implied Share Price
Implied Enterprise Value
$
47,949
Less Debt
($19,145.00)
Implied Market Cap
$
28,804
Implied Share Price
$
31.84
Terminal Value
Terminal Growth Rate
2017E Terminal Value
$3,875.36
$1,166.64
(874)
(269)
(77)
$310.16
4,132
2,829
71,806
49,166
2.00%
* All years above represent fiscal years ended December 31
Ben Graham Formula
Benjamin Graham Formula
Current (normal earnings)
$
Expected annual growth rate (%)
2
Number of shares
Estimated price per share
2,697.69
904.7
$
31.31
Comparable Analysis
Company Comp Set
Company Name
TEV/Total
Revenues
TEV/EBITD TEV/EBIT
A
TEV/Forward TEV/Forward Forward
Weight
Total
EBITDA
P/E (Capital
Revenue
(Capital IQ) IQ)
(Capital IQ)
CBS Corporation (NYSE:CBS)
DIRECTV (NasdaqGS:DTV)
The Walt Disney Company
(NYSE:DIS)
2.7x
1.7x
3.1x
11.3x
6.7x
11.1x
13.0x
9.8x
13.5x
2.68x
1.60x
2.89x
10.5x
6.4x
10.3x
17.51x
11.61x
18.09x
25%
10%
10%
Twenty-First Century Fox, Inc.
(NasdaqGS:FOXA)
3.1x
13.2x
15.3x
2.86x
12.6x
20.68x
25%
Viacom, Inc. (NasdaqGS:VIAB)
Time Warner Inc. (NYSE:TWX)
3.3x
2.6x
10.6x
9.8x
11.3x
11.1x
3.11x
2.54x
9.9x
9.9x
14.48x
16.16x
30%
100%
Comparable Analysis
TEV/Total TEV/EBITD
Revenues
A
High
Low
Mean
Median
Weighted Average
3.3x
1.7x
2.8x
3.1x
2.9x
13.2x
6.7x
10.6x
11.1x
11.1x
TEV/EBITTEV/Forward TEV/Forward
Total
EBITDA
Revenue
15.3x
9.8x
12.6x
13.0x
12.8x
3.1x
1.6x
2.6x
2.9x
2.8x
12.6x
6.4x
9.9x
10.3x
10.4x
Forward P/TangBV
P/E
20.7x
11.6x
16.5x
17.5x
15.5x
11.8x
13.7x
13.7x
Comparable Analysis
Implied Equity Value
High
Low
Mean
Median
Weighted Average
102,918.4 208,322.5 218,243.0
5,918.2 35,513.9 51,395.0
61,766.8 83,755.4 92,729.9
69,115.3 70,392.7 76,035.0
67,606.7 71,588.8 73,794.8
86,742.98 245,540.73 79,983.62 406,985.72
2,725.03
32,227.9 47,762.73 42,749.52
58,345.22 77,381.71 66,905.73 111,247.64
67,937.52 61,032.91 69,559.22 66,609.71
67,645.0
64,800.2
-
Shares Outstanding
904.7
904.7
904.7
904.7
904.7
904.7
904.7
904.7
Implied Price per Share
High
Low
Mean
Median
Weighted Average
113.8
6.5
68.3
76.4
74.7
230.3
39.3
92.6
77.8
79.1
241.2
56.8
102.5
84.0
81.6
95.88
3.01
64.49
75.09
74.8
271.41
35.62
85.53
67.46
71.6
88.41
52.79
73.95
76.89
449.86
47.25
122.97
73.63
-
Mean Equity Value Across
Multiples
High
Low
Mean
Median
Weighted Average
$
Price Per
Share
212.97
34.47
87.18
75.9
76.36
Decision Drivers
Positive drivers
• Better Market prospect
• Spin-off of Time. Inc
• Constant Growth in Network Segment and better prospect
from Film Segment
Negative drivers
• Constant Asset Impairment
• Underperform the Market
Valuation Results
Valuation Results
Current Price*
$
65.44
DCF Analysis
$
31.84
Graham Formula
$
31.31
Relative Price
$
76.36
*As of December the 4th
Recommendation
Watchlist
Q&As
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