TIME WARNER(NYSE:MOS) NOVEMBER 7, 2013 Dec. 5, 2013 Zijian (Paddy) Gu, Zige (Z) He, Charalampos (Haris) Ntantanis 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 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 Thank you for your attention! Any questions??
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