Analyst Upgrades Time Warner Stock, Calling Company 'A Lean, Mean TV Machine'

7:18 AM PST 09/19/2013 by Georg Szalai
Michael Loccisano/Getty Images
Time Warner chairman and CEO Jeff Bewkes

But Morgan Stanley analyst Benjamin Swinburne downgrades his Walt Disney rating, saying the conglomerate's stock doesn't deserve its traditional price premium anymore.

Morgan Stanley analyst Benjamin Swinburne on Thursday upgraded his rating on the stock of Time Warner from "equal-weight" to "overweight," calling the entertainment company "a lean, mean TV machine."

Raising his earnings estimates and his price target to $72, he said the company's valuation was "at the low end of peers despite strong growth and below-peer average ad exposure."

But Swinburne downgraded his rating on Walt Disney shares to "equal-weight," saying the entertainment conglomerate's traditional premium stock price is "no longer a given."

Following the spin-off of its Time Inc. publishing arm next year, the new Time Warner will get 90 percent-plus of its operating earnings "from the healthy and growing TV ecosystem," he said in a report. He also touted "accelerating growth from 2014-2016 … multiple sources of margin upside to consensus and the benefits of above-average financial leverage."

The spinoff will make TW "a concentrated bet on global TV growth," Swinburne said. "We expect the Turner Networks re-pricing cycle and a healthy dose of financial leverage to drive 8 percent-plus earnings before interest and taxes growth and 15-20 percent earnings per share growth annually with less variability versus peers."

Emphasizing that TW is a content company, the analyst said that "notably, owned content drives growth at HBO and the film segment."

TW's studio derives 50-60 percent of its operating profit from its TV business, which is "enjoying rising U.S. and global demand for high-quality original scripted series from both traditional cable nets and the growing international TV ecosystem and Warner Bros.’s vast and growing TV library from on-demand channels," Swinburne said.

TW's stock in early Thursday trading was up 1.9 percent. Disney shares were down 1.4 percent.

"Since 2009, we built our thesis on confidence in ESPN’s pricing power and returns on [theme] parks investments," Swinburne said about Disney's stock on Thursday. "This thesis has largely played out and is reflected in estimates. From here, growth shifts to a greater reliance on creative success, including proving out acquisitions at the box office."

Wall Street particularly expects "a major earnings contribution from the recently acquired Lucasfilm," Swinburne said. "We are not betting against Star Wars being a global box office hit in 2015, but rather the ability to deliver earnings and returns beyond what is already discounted in shares. This is in light of the unclear film/consumer products benefit since the Marvel acquisition -- despite smashing box office success, highlighted by the $1.5 billion worldwide box office hit The Avengers."

Lowering his price target to $70, Swinburne said that "Disney's historical [stock price] premium was a function of both preference for Disney and a lack of options." But he added: "Today, we see other strong growth (21st Century Fox, Discovery Communications) and re-rating (CBS, Time Warner) opportunities elsewhere in media."

E-mail: Georg.Szalai@THR.com
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