03 November 2005

TWX - Another cheap media stock with a buyback?

Time Warner (TWX) has been on my radar for years now.


There are a few random reasons for this.

One, its former CEO, Gerald Levin, used to be one of my alma mater's most famous alumni. Since he was one of the masterminds behind merging with AOL at its market peak, Levin is now one of Haverford's most infamous alums, right up there with Mr. Anna Nicole Smith himself, J. Howard Marshall, III.

Two, an investing idea dawned on me back in mid-2002 when then AOL Time Warner plummeted to around $9 a share. The idea is to buy stocks when there's bad news, but not really bad news, or BNBNRBN, a horrible acronym if there ever was one. I thought the AOL acquisition was terrible, but other underlying businesses like Time Warner Cable and HBO meant that there were some solid cash-generating companies mixed into the unwieldy conglomerate. I really wanted to buy some shares three years ago, and test my BNBNRBN thesis. Too bad paying off my credit cards took priority at the time.

And three, I have everyday exposure to Time Warner's products and services. I subscribe to Time Warner Cable. Watch HBO and CNN. Listen to bands on Time Warner labels (that's now a spun-off company, I believe). Watched films and television shows produced by them.

TWX has also been stuck in a rut between $14-$20 for the last two years, even though post-Levin CEO Dick Parsons smartly demoted AOL to a mere subsidiary, and ousted Steve Case from the board.

So, should I look at TWX as a long-term investment? It's now got a dividend yield around 1.1%. The stock buyback has been upped from $5B to $12.5B, in an attempt to boost the share price. There seems to be good news for shareholders coming out of TWX after the AOL-induced drought, from the AP:

...Per-share earnings came in at 19 cents compared with 11 cents a year ago. Analysts polled by Thomson Financial were expecting a profit of 17 cents per share.

Revenues rose 6.1 percent to $10.54 billion from $9.94 billion.

At the same time, the company also announced that its board of directors had approved an increase in its share buyback program to $12.5 billion over the next 21 months, up from the previous level of $5 billion.

Shareholders have been clamoring for Time Warner to take steps to lift its moribund share price, which is still about 75 percent below the levels it saw prior to agreeing to be bought in early 2000 by AOL. That deal resulted in shareholder lawsuits, regulatory scrutiny and a management purge.

The third-quarter gains were driven by strong showings in cable TV, which benefited from customers signing up for more premium services like high-speed Internet and digital phone, and cable networks, which had gains from the syndication of HBO's ''Sex and the City'' and higher advertising.
Revenue at AOL declined 5 percent in the quarter on a 10 percent decline in revenues from subscriptions, which more than offset a 28 percent rise in online advertising. AOL lost another 678,000 subscribers in the period, ending the quarter with 20.1 million U.S. members. However, earnings rose 16 percent on lower network and marketing costs.

AOL was long seen as a drag on Time Warner due to the steady decline of the dial-up Internet access business, but in recent months AOL has been successfully revamping its business model, moving away from the subscription business and selling more online advertising, as investor favorites Google Inc. and Yahoo Inc. do. AOL is now the subject of acquisition talks with those and other suitors.

I attempted a quick DFCF model using the following data:
Share Price of TWX = $17.90
Shares Outstanding = 4.69B
FCF = $3644M
Perpetuity Growth Rate = 3%
Discount Rate = 10%
FCF Growth Rate = I pulled 3% from my keyster since TWX's FCF grew 129% between '01 and '02, but declined 2.34% the following year, with another 3.23% decline from '03 - '04. '04 to the TTM has FCF up 1.39%. This is where the model gets, um, artsy.

Using this data, I processed the sausage to come up with $11.44 per share.

So maybe TWX isn't so cheap, but I'm not about to let my model get in the way. I think the board's focus on unleashing shareholder value is very attractive, or even sexy.

I must digress. I love that cliche "unleashing shareholder value", like shareholder value is a pit bull tied to a tree, with steaks sizzling on an unattended grill, just inches beyond the taut length of the leash. The pooch strains, choking himself on the collar. The dog drools. He wants steak, like any dog. He wants to chomp whoever tied him up like this. The neighborhood kids don't ride their big wheels near the yard where Shareholder Value lives. Especially when he's hungry.

Oh boy, it's late. I'm now imagining Shareholder Value as Chopper from Stand By Me.

Any thoughts on TWX? Anyone bearish in spite of the good news?

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