Time Warner Hopes Latest Earnings Report Will Help its Stock

The entertainment giant, whose shares have underperformed peers amid Netflix's growth and other concerns, posts its fourth-quarter financials on Wednesday.

NEW YORK -- Time Warner has continued to report solid financial growth, often outperforming competitors, and has paid a higher dividend than its peers, but its stock has underperformed shares of other entertainment conglomerates over the past year.

That is just one reason why Wall Street folks will watch the company's fourth-quarter earnings report and conference call comments from management closely on Wednesday.

In 2010, TW shares rose more than 10%, beating the broader market, but lagging its fellow media giants with the exception of News Corp.

According to Bloomberg, the one-year return for TW shareholders is 18.5%, ahead of News Corp., but well behind the 36.6% of Walt Disney, 48.4% of Viacom and the 52.1% of CBS Corp. And while Disney, Viacom and CBS shares have hit new 52-week highs and their highest levels in years early this year, TW remains about $1.75 below its 52-week high.

TW chairman and CEO Jeff Bewkes during an appearance at a big annual UBS media investor conference in December acknowledged that the stock's momentum has been "a little frustrating" amid what he called a superior operating performance of the company and its focus on rewarding shareholders via dividends and stock buybacks.

After shedding AOL and Time Warner Cable, his team has focused the investor story around financial returns and TW's strong content brands.

Analysts say that some ratings challenges at select cable networks, including the often-discussed issue of CNN's performance in primetime, and some recent boxoffice flops, such as Yogi Bear, have raised some temporary investor concerns about the content powerhouse. "The poor run of current films is unusual," said Larry Haverty, portfolio manager at Gamco Investors.

But changing media business models in the digital age have been a more fundamental worry, even though TW management has consistently argued that Netflix's streaming video service will prove to have its limits, and the digital age provides more opportunities than risks

"Time Warner remains the content company most exposed to cord cutting concerns," said Davenport & Co. analyst Michael Morris in a recent report in outlining one key investor concern that may help explain why TW shares seem to have been held back more than those of peers.

"Time Warner has been under some fire because of [broadband] video providers and what Netflix is doing, because Netflix is seen as a direct competitor to HBO," explained David Bank, analyst at RBC Capital Markets. "Also, the view is that the more must-have programming you have, the less concerned you are.

With Time Warner the concern is that's it's a portfolio of channels repackaging syndicated shows."

But Bank likes the company, its management team and its strategy.

"That is the headline fear," he said. "I think it is overdone."

Miller Tabak analyst David Joyce echoed the sentiment. "We are fans of TW assets and the stock. It has been a frustrating mover, perhaps due to too much investor concern over the CNN and HLN ratings declines."

On TW's earnings call Wednesday, expect management to once again make the case for the company and its stock.

Wall Street observers hope to hear some updates that could help boost investor confidence early in the year after January saw TW shares once again lag its peers

For example, TNT and TBS are investing alongside CBS in the NCAA tournament starting this spring, and analysts hope for some color on the benefits of that sports investment.

"Fourth-quarter 2010 results will likely once again focus on HBO subs, and any indication of positive HBO sub adds or a significant progress with HBO Go could provide a much needed boost to sentiment, although at this point we feel it is still impossible to disprove a negative," said Bank.

Spencer Wang, analyst at Credit Suisse, recently recommended that investors buy TW shares ahead of the earnings report, which most expect to show more growth. "We expect management to provide 2011 guidance and see upside to consensus estimates," Wang said.

"Another catalyst may be increased returns of capital." Morris recommends that investors stay on the sideline for now, but he also sees potential further shareholder returns. "The company remains a strong cash-flow generator (we estimate bout $3 billion in sustainable free cash flow) and could increase its [stock] buyback pace from $2 billion per year or its dividend," he said.