Analysts Debate Time Warner Stock as Fox Drops Bid, Earnings Rise

Rupert Murdoch Jeff Bewkes - H 2014
AP Images

Rupert Murdoch Jeff Bewkes - H 2014

Before a highly anticipated earnings call with the TW team, which late on Tuesday said it was focused on long-term value, the stock drops, and analysts debate a possible second bid down the line.

Time Warner's stock opened down more than 10 percent on Wednesday after similar trends in Tuesday's after-hours trading following 21st Century Fox's decision to drop its bid for the company.
As of 9:50 a.m. ET, TW shares were down 11.3 percent at $75.53. That was roughly where the stock had settled in after-hours, but still up from the mark of around $71 before the Fox bid. Fox shares were up 3.4 percent at $32.09 in early Wednesday trading.
Analysts said on Wednesday that the end of the pursuit outweighed TW's better-than-expected second-quarter earnings report early in the day and discussed the outlook for TW shares.
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"Management showed great execution on the cost side to deliver a nice second quarter," said Wells Fargo analyst Marci Ryvicker. "But after reiterating 2014 guidance of low-teens earnings per share growth, investors will likely want to hear why management believes the company can deliver better returns than Fox's bid."
Jefferies & Co. analyst John Janedis on Wednesday maintained his "buy" rating on TW, but highlighted that he expects "the stock to be weak today with the termination of the Fox bid."
Stifel, Nicolaus analyst Drew Crum echoed that stance, maintaining his "buy" rating and $93 target price on TW's stock.
"While we believe our fundamental thesis remains intact, we expect the shares to be under severe pressure amid Fox's decision to pull its bid to acquire the company," he said in a report. "We expect TW management to address this issue on Wednesday morning by justifying (or at least attempting to) the company's decision to rebuff Fox's offer."
Notwithstanding recent events, he said he remains "positive in our fundamental thesis for Time Warner, which is based on the affiliate renewal cycle for the domestic Turner networks, improved monetization for HBO, a favorable backdrop for international, [a] solid film and television pipeline, aggressive management of overhead, and [the] continued deployment of cash flow."
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But Crum and others on Wall Street suggested the last word on a Fox-TW deal may not be spoken yet. "We would not rule out a takeout scenario from Fox," he said.
Guggenheim analyst Michael Morris echoed that, saying: "We do believe that Fox and TW could revisit a potential combination under friendly terms in the future, but believe that yesterday's announcement indicates that Fox is not interested in a hostile bid."
And Morgan Stanley's Benjamin Swinburne said: "While Fox has withdrawn its offer, we do not necessarily assume this process is over." He added: "We believe TW shares are likely to continue trading with some strategic premium embedded."
In a 10:30 a.m. ET earnings conference call, TW CEO Jeff Bewkes is expected to outline his team's growth plans as an independent company.
"Time Warner’s board and management team are committed to enhancing long-term value and we look forward to continuing to deliver substantial and sustainable returns for all stockholders," the entertainment conglomerate had said in a statement late on Tuesday. "Time Warner is well positioned for success with our iconic assets, including the world’s leading premium television brand, the world’s strongest ad-supported cable network group and the world’s largest film and television studio. We thank our stockholders for their continued support."
The stocks of other entertainment conglomerates were mixed on Wednesday as Wall Street gauged their outlook amid latest earnings reports and the end of the Fox bid, which had helped boost sector stocks.
As of 9:50 a.m. ET, CBS Corp.'s and Walt Disney's stocks were up slightly, but Viacom was down 1.8 percent after a slightly weaker-than-expected earnings report.
Twitter: @georgszalai