Analyst Cuts Time Warner Stock Rating Citing Run-Up
Evercore's Alan Gould also argues that there is a limited pool of potential acquirers for the company, that HBO is facing increasing competition and that film unit financial comparisons are "challenging" near-term.
Evercore Partners analyst Alan Gould has lowered his rating on the stock of Time Warner from "overweight," similar to a "buy," to "equal-weight," or "neutral," citing the stock's run-up this year.
"Time Warner has the best TV production company with both Warner and HBO, a very shareholder-friendly capital allocation program and a stock that is not expensive," Gould said in a report. "But the stock has had one of the best runs among entertainment companies this year, and it is approaching our $75 price target."
The stock on Monday closed at $71.68, near its 52-week high of $73.07.
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He added: "We are projecting a lower growth rate for TW than its peers, do not see the likelihood of upside earnings surprises and our 2015 and 2016 estimates are below consensus."
Gould also commented on possible dealmaking in Hollywood amid a slew of recent deals between pay TV operators, including the planned Comcast acquisition of Time Warner Cable, Charter's plan to buy some of the combined firm's systems and AT&T's plan to acquire DirecTV. "The proposed distributor consolidation should lead to content consolidation, and TW has been mentioned as a potential acquisition candidate," he wrote. "But we note that TW has an $85 billion enterprise value before adding any takeover premium, which limits the pool of potential acquirers."
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Talking about Warner Bros., Gould said that "on paper, the film schedule looks challenging" in 2015, but he added that "there always tend to be some surprises."
For 2014, Gould predicted "a big DVD quarter" for Warner in the second-quarter earnings report, "which will offset a tough theatrical comparison." He added: "The second half [of the year], though, will have very challenging film comparisons — the low-budget The Conjuring and We're the Millers in the third quarter and Gravity in the fourth quarter of last year."
He continued: "Warner should have a strong syndication year, but 2 Broke Girls is being syndicated to Turner, so much of that profit will be reversed in intercompany eliminations."
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He also projected a lower HBO growth rate in 2015 following a recent Amazon licensing deal that he says will boost this year's figures.
"HBO is producing some of the best programming in its history, as evidenced by its recent 99 Emmy nominations, and has created one of the best apps but is facing a more competitive environment," the analyst argued. "Netflix is now spending more on total programming than HBO, and within a few years could be spending as much as HBO on originals. In addition, Showtime, Starz, Amazon, Hulu, AMC, and Fox are all spending more on original programming."
He added: "We still estimate that HBO spends close to three times Netflix on original programming, $700 million versus $250 million, but Netflix is in a heavy ramp mode for originals, and we expect that gap to shrink over the next few years."
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Meanwhile, Gould said that Turner continues to see ratings declines. Former TW CFO John Martin is now running the division. "We have strong confidence in Mr. Martin, but it will take time for his changes to be reflected in higher ratings," the analyst said, going on to say that the networks likely will have to spend more on programming in the process.