Time Warner Stock Hits Multi-Year High as Analysts Cheer Magazine Unit Spin-Off

The stock of Time Warner hit a multi-year high early Thursday after Wall Street analysts gave the conglomerate's decision to spin off its Time Inc. publishing unit a big thumbs up, with several raising their price target on the shares and at least one upgrading the stock.

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Time Warner's stock hit $56.46 in early trading, up 1.8 percent, a 52-week high and the highest price at least since the company went back to using the corporate name Time Warner and the stock symbol "TWX" in Oct. 2003 after initial disappointment with how the AOL-Time Warner merger had played out.

A TW source said it was a 10-year high, but not an all-time high. TW's stock on Wednesday had set a then-high of $56.07 before closing up 0.7 percent at $55.46, giving the company a market value of $51.8 billion.

Many analysts on Thursday highlighted the challenges that magazine businesses have faced and the drag Time Inc. has been on the Hollywood giant's financial growth rates.

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Wednesday night's announcement of the spin-off "immediately washes away any doubts about execution risk and managerial infighting over a messy joint venture structure that TW was considering with the Meredith Corporation," B. Riley Caris analyst David Miller said in a report in upgrading TW's stock from "neutral" to "buy." "Finally, TW will spin-off Time Inc. into a separately-traded public company."Miller, who has a $65 price target on the stock, added: "The announcement measurably improves TW’s growth profile, margin profile and rids the mother company of a business, which has been under secular siege for quite some time."

Credit Suisse analyst Michael Senno on Thursday maintained his "outperform" rating on TW and raised his stock price target by $5 to $61.

"Similar to News Corp.’s decision to split, TW hopes to unlock value by separating the structurally challenged print business and focusing on the higher-growth media assets," he said. "The move completes TW'’s transformation from conglomerate to pure-play media asset, following the separation of AOL and Time Warner Cable in 2009."

Excluding the publishing division, TW'’s advertising exposure declines from 21 percent of total revenue to 17 revenue, the lowest among its Hollywood conglomerate peers, Senno said. "This reinforces its defensive characteristics, one of the drivers of our investment thesis," he explained.

Lazard Capital Markets analyst Barton Crockett, who maintained his "buy" rating, similarly emphasized that the key benefit of the Time Inc. separation will be that it will free "the growing TV network business from the drag of a secularly challenged magazine segment."

Barclays Capital analyst Anthony DiClemente, who has an "equal weight" rating on TW, also highlighted that the spin-off will leave the company with "an improved asset mix and growth profile." He added: "By shedding a non-core business with exposure to cyclical advertising revenues, we believe the multiple for core Time Warner - cable networks, film and TV production- will re-rate higher." He therefore raised his price target by $2 to $54.

Many Wall Street experts drew comparisons to News Corp.'s decision to separate its entertainment from its publishing businesses. "We'd also note that across our coverage universe, over the last year there have been several transactions that involved exiting non-core/no-growth media and publishing assets, including CBS [which is converting its outdoor unit into a real estate investment trust]," Stifel Nicolaus analyst Drew Crum said. "All were well received by investors, and we'd expect the same for TW."

Analysts on Thursday also estimated the value of the publishing business at around $3.0 billion-$3.5 billion. "The planned departure of new Time Inc. CEO Laura Lang post-spin could weigh on the Time Inc. multiple as it highlights a recent spate of [executive suite] instability,"
Crockett said. "But appointment of an able successor should ease worries."

DiClemente address a possible investor question if the newly entertainment-focused TW could look for acquisitions in the content space. "After finally slimming down the company to an optimal mix of higher-growth assets, we think management is unlikely to pursue any large-scale M&A in the near-term," he suggested. "Instead, we expect they will continue to make smaller acquisitions internationally where there are compelling growth opportunities, particularly in pay TV. Most importantly, we believe management will stick to its strategy of robust capital returns through dividends and share repurchases."

Email: Georg.Szalai@thr.com

Twitter: @georgszalai