time warner(nyse:mos) november 7, 2013 zijian (paddy) gu, zige (z) he, charalampos (haris) ntantanis...
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TIME WARNER(NYSE:MOS)NOVEMBER 7, 2013Zijian (Paddy) Gu, Zige (Z) He, Charalampos (Haris) NtantanisDec. 5,
2013
Agenda
● 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 AnalysisNetwork 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 AnalysisPublishing•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 Breakdownby 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
2013Source: 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
Movie & Video Production
Magazine &Periodical Publishing
TelevisionProduction
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
Source: IBIS World
Industry Analysis
Source: IBIS World
• 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
Industry Analysis - Key Success Factor
Source: IBIS World
Strong Brand NameEstablish positive perceptions
Skilled and Talented WorkforceEnable great product and strong brand
Cost ControlMeet contractual agreement
Adaptation to New TechnologyImprove outcome and reduce cost
Equity Performance
Source: Google Finance
Technical Analysis
Source: Yahoo finance
Financial AnalysisLiquidity 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
Profitability Ratios 2008 2009 2010 2011 2012Gross Profit Margin 43.59% 43.93% 44.13% 43.70% 44.54%Operating Profit Margin -11.52% 17.61% 20.19% 20.04% 20.60%Net Margin -50.68% 9.76% 9.59% 9.96% 10.51%ROA -11.75% 3.77% 3.88% 4.26% 4.42%ROE (Book Value) -29.34% 7.34% 7.83% 9.63% 10.10%
Solvency Ratios 2008 2009 2010 2011 2012Debt/Assets 0.17 0.23 0.25 0.29 0.28 Debt/Equity 0.43 0.46 0.50 0.65 0.64 Interest Coverage (2.24) 3.83 4.61 4.80 4.72
Financial Analysis
Activity Ratios 2008 2009 2010 2011 2012A/R Turnover 4.05 4.96 4.68 4.35 4.02 Days Sales Outstanding 90.09 73.62 77.94 83.99 90.88 Inventory Turnover 7.56 7.88 8.14 8.56 8.07 Days Inventory on Hand 48.31 46.29 44.81 42.63 45.24 A/P Turnover 2.29 1.82 1.92 2.10 2.01 Days Payables Outstanding 159.71 200.97 189.87 173.96 181.93 Fixed Asset Turnover 6.44 6.41 6.94 7.31 7.29 Total Asset Turnover 0.23 0.39 0.40 0.43 0.42
Greenblat Ratios 2008 2009 2010 2011 2012EBIT/Tangible Assets (0.16) 0.19 0.21 0.22 0.23 EBIT/EV (0.32) 0.33 0.26 0.23 0.22
DuPont AnalysisDuPont Analysis
2008 2009 2010 2011 2012Tax Burden 304.71% 76.52% 65.78% 66.10% 66.47%Interest Burden 144.45% 72.42% 72.20% 75.21% 76.75%Operating Profit Margin -11.52% 17.61% 20.19% 20.04% 20.60%
Asset Turnover 0.23 0.39 0.40 0.43 0.42
Leverage 2.50 1.95 2.02 2.26 2.29
ROE -29.34% 7.34% 7.83% 9.63% 10.10%
Cost of Capital
CAPM Risk-Free Rate 2.83%Market Risk Premium 6.00%5-Year Beta 1.11 CAPM Cost of Equity 9.48%
Weighted Average Cost of Capital
Share Price* $65.44
Shares Outstanding (millions) 904.72
Market Value of Equity $ 59,204.88
Debt $19,145.00 Percent Equity Weight 75.56% Percent Debt Weight 24.44% Cost of Debt 6.84% Cost of Equity
CAPM Cost of Equity 9.48% 30.00% Cost of Equity WeightingsROE 8.73% 70.00%
Cost of Equity 8.95% Tax Rate 34.0% Business Premium 2.0% WACC 9.9% *As of December the 4th
DCF AnalysisTime Warner Discounted Cash Flow Analysis ($ millions)
2013E 2014E 2015E 2016E 2017E Terminal ValueNet Income $2,697.69 $3,519.10 $3,631.71 $3,751.56 $3,875.36 Depreciation $1,026.54 $1,059.39 $1,099.41 $1,129.37 $1,166.64 Capital Expenditures (709) (763) (804) (846) (874) Changes in Net Working Capital
Less Increases in A/R (13) (237) (244) (260) (269) Less Increases in Inventories (71) (68) (70) (75) (77) Plus Increases in A/P $474.02 $273.38 $282.12 $300.25 $310.16
Free Cash Flow $3,405.76 3,784 3,895 4,000 4,132 71,806 Present Value 3,157 3,252 3,103 2,954 2,829 49,166
Terminal Value Terminal Growth Rate 2.00%
* All years above represent fiscal years ended December 31
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
Ben Graham Formula
Benjamin Graham Formula
Current (normal earnings) $ 2,697.69
Expected annual growth rate (%) 2
Number of shares 904.7
Estimated price per share $ 31.31
Comparable Analysis
Company Comp Set Company Name TEV/Total
Revenues TEV/EBITDA
TEV/EBIT TEV/Forward Total Revenue (Capital IQ)
TEV/Forward EBITDA (Capital IQ)
Forward P/E (Capital IQ)
Weight
CBS Corporation (NYSE:CBS) 2.7x 11.3x 13.0x 2.68x 10.5x 17.51x 25%DIRECTV (NasdaqGS:DTV) 1.7x 6.7x 9.8x 1.60x 6.4x 11.61x 10%The Walt Disney Company (NYSE:DIS)
3.1x 11.1x 13.5x 2.89x 10.3x 18.09x 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) 3.3x 10.6x 11.3x 3.11x 9.9x 14.48x 30%
Time Warner Inc. (NYSE:TWX) 2.6x 9.8x 11.1x 2.54x 9.9x 16.16x 100%
Comparable Analysis
TEV/Total Revenues
TEV/EBITDA
TEV/EBITTEV/Forward Total
Revenue
TEV/Forward EBITDA
Forward P/E
P/TangBV
High 3.3x 13.2x 15.3x 3.1x 12.6x 20.7x 15.5xLow 1.7x 6.7x 9.8x 1.6x 6.4x 11.6x 11.8xMean 2.8x 10.6x 12.6x 2.6x 9.9x 16.5x 13.7xMedian 3.1x 11.1x 13.0x 2.9x 10.3x 17.5x 13.7xWeighted Average 2.9x 11.1x 12.8x 2.8x 10.4x
Comparable Analysis Implied Equity Value High 102,918.4 208,322.5 218,243.0 86,742.98 245,540.73 79,983.62 406,985.72 -Low 5,918.2 35,513.9 51,395.0 2,725.03 32,227.9 47,762.73 42,749.52 -Mean 61,766.8 83,755.4 92,729.9 58,345.22 77,381.71 66,905.73 111,247.64 -Median 69,115.3 70,392.7 76,035.0 67,937.52 61,032.91 69,559.22 66,609.71 -Weighted Average 67,606.7 71,588.8 73,794.8 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 113.8 230.3 241.2 95.88 271.41 88.41 449.86 -Low 6.5 39.3 56.8 3.01 35.62 52.79 47.25 -Mean 68.3 92.6 102.5 64.49 85.53 73.95 122.97 -Median 76.4 77.8 84.0 75.09 67.46 76.89 73.63 -Weighted Average 74.7 79.1 81.6 74.8 71.6
Mean Equity Value Across Multiples
Price Per Share
High 212.97 Low 34.47 Mean 87.18 Median 75.9 Weighted Average $ 76.36
Decision DriversPositive 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
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Q&As
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