Time Warner Is the Future of Big Media

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NEW YORK (TheStreet) -- For years, media giant Time Warner has intrigued me. The company specializes in great drama, but it created some real-world theater on Wall Street when it merged with -- some would say, was acquired by -- AOL .

That event generated some high ratings for market observers. The CEOs of both firms provided an excellent performance during the announcement. The market at the time could not know the merger would end in tragedy, with the spinoff of AOL. The divorce generated much applause from analysts and investors.

While AOL is still trying to find its footing in the realm of social media, Time Warner has seen a resurgence of sorts. Not only is the stock merely percentage points away from its 52-week high, but it has appreciated by over 130% over the past three years. Remarkably, this is despite a relatively flat performance on the year, gaining only gained 3% so far. Leading into the company's earnings announcement, I was eager to see if there was cause for optimism but more importantly to affirm my belief that the stock was trading at a considerable discount when compared to rivals such as Comcast , Disney and News Corp. .

An Entertaining Quarter

For the period ending in March, Time Warner broadcast a net income of $583 million. While that exceeded analyst expectations, it also represented a decline of 11% from $653 million during the same period a year ago. Excluding items, first-quarter profit arrived at 67 cents per share -- topping analyst estimates of 64 cents as well as last year's figure of 58 cents. Revenue increased 4% to $7 billion, ahead of expectations of $6.82 billion.

Contributing to the increase in revenue were strong advertising sales, but the company attributed the performance to "better timing" of the NCAA's March Madness tournament. The company reported an increase of 6% in adjusted operating income to reach $1.35 billion, while operating margin expanded 30 basis points to 19.4%. In terms of outlook, the company reaffirmed its double-digit growth expectation for the balance of 2012.

Moving Forward

As disappointing as the decline was in net income, it did however top analysts' estimates. In assessing the overall report, it is clear that the business is moving in the right direction, for which the company's chairman and chief executive Jeff Bewkes said offered the following:
We're off to a great start to the year, and we're benefiting from strong momentum for our content across our businesses. In the quarter, we saw impressive viewership gains at many of Turner's networks, including TBS ranking as the No. 1 network on cable among its key demographics. Reflecting our confidence in our competitive position and growth prospects, we've repurchased almost $900 million of our stock so far this year.

I have to agree with Bewkes. I think that this momentum should continue not only toward the rest of 2012, but also in the early parts of 2013. To that end, the company has shown a commitment to consumers by working to expand its digital presence and its programming, showing also that it is focused on delivering both blockbuster hits and solid market-beating performances.

Another area that should impress investors is the fact that the company has also been working on its "TV Everywhere" initiative or, more specifically, HBOGo -- something that not only sets it apart from rivals Disney and Comcast but also leaves Netflix feeling pretty inadequate.

Time Warner understands the future of TV and anticipates that at some point the subscription model will venture on to the cloud. In that regard, it has forged deals with Apple , which is in the midst of its own TV project to make mobile versions of its magazines available for the iPad.

The company also understands the current crave of social media and its potential future impact on TV. For this reason it acquired Flixster last year, a social networking service for movie enthusiasts. I suspect that the company will eventually adopt Flixster's offerings as part of a long-term digital strategy that includes HBOGo. Clearly there is going to be a transformation of traditional media and Time Warner is poised to serve as the pioneer.

Bottom Line

Ben Graham, one of the world's most successful investors, operated with an important precept. He would consider any company whose price-to-earnings ratio (over a three-year average) multiplied by its price-to-book was higher than 22.5. I have found that Time Warner indeed fits the criteria.

It is one thing for investors to look at a stock and see value, it is also very rewarding for when management affirms that value by repurchasing shares - which Time Warner did to the extent of 24 million shares, aggregating $889 million. The company's board of directors had authorized a share buyback plan of $4 billion in January 2012.

Time Warner continues to be one of those names on Wall Street that flies under the radar -- pretty remarkable when you consider how successful of a broadcast media company it has been. Looking at the company's stock and its P/E of 13 relative to its peers, there are two things that come to mind -- either Comcast, Disney and News Corp. are grossly expensive at P/Es of 20, 16 and 16 respectively or Time Warner is significantly undervalued. At least management agrees with me.

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