1. Philip Addison – 4/6/2016
Time Warner Incorporated NYSE: TWX
Current Recommendation: BUY
INDUSTRY: MEDIA ENTERTAINMENT
Description:
Time Warner is an American multinational multimedia and
entertainment conglomerate with assets such as HBO, Warner
Brothers and DC Comics. With major operations in film and
television, it is the third largest television networks and film
entertainment company in terms of revenue.
BUY Recommendation
After thoroughly analysing the company, I
recommend buying the stock or even better,
purchasing a call option in the near future. This
view is fuelled by the fact with ever increasing free
cash flows and a lower cost of capital than ROIC,
TWX will see an increase in share price. The
diminishing number of shares outstanding will also
play a role in this. Having said that, it may be
prudent to further investigate other companies in
the same industry. They mostly have better
fundamentals than TWX which does not even beat
the market.
Key Points
- 5 year stock price is
upward facing signifying
growth
- In 2011, management
decided to focus on
maximizing efficiency by
cutting overhead costs.
This was an effort to
increase margins
- Stock price has since by
fuelled by this effort but
further analysis will show
that it is slowing down
- Although stock price has
been increasing at a faster
rate than the S&P 500, it
still lags behind
competition

2. Financial Management
The horizontal trend
analysis (2011-2015) shows
a bit of a hit and miss
approach to Time Warner’s
finances for the period.
Although management was
meeting their goal of
increasing margins, 2014
took a big hit and the
company has still not seen
2011 revenue numbers. The
table below shows that in
all but one of the years,
Gross Income has grown. Sales growth also shows a positive
correlation with COGS growth.
Technical Analysis
Vertical trend
analysisforthe
past 10 shows how
Time Warner has
gradually
decreasedits
proportionof
intangible assetsas
well asitsNetPPE,
whilstincreasingits
OtherLong Term
Assetsand
Accounts
Receivables.
Evidence also
pointstowardsthe greaterreliance of debtuse inthe firmas Total Liabilities encompassagreaterportionof the
balance sheet.
Time Warner has faced a tumultuous time in the past five years. After
reaching an all-time 5 year high revenue of 29.8 billion in FY2013,
FY2016 is still trying to recover from the losses suffered in FY2014 and
FY2015. Stock price has gradually increased over the past five years at a
pace quicker than the S&P 500 as shown on page 5. The 5 day moving
average and average number of shares traded indicates that whilst TWX
might be stable in the midterm, it will increase in the long run.

3. ROA & ROE
 Since the recession in 2008,
ROE has been steadily
increasing albeit at a slower
rate than the market.
 ROE reached an all-time
high of 16.23% due to the
decreasing amount of
shareholders equity and the
increasing amount of net
income attributable to them.
 In comparison to its
competitors, Time Warner
boasts the third highest ROA
numbers at 6% behind Walt
Disney’s 9.51% and
Twentieth Century Fox’s
16.6%
 Since the recession, Time
Warner has always posted
gradual increases in its ROA
with the 4 other major
competitors all posting losses
at some stage.
Risk Analysis
TWX operates in a highly
competitive, consumer driven and
rapidly changing environment. As
reported in the fundamental
analysis, macroeconomic factors
can greatly affect firm and
industry performance. With the
advent of the internet of things,
more and more consumers are
switching from traditional cable
based viewing systems to a more
online medium. Furthermore, with
a high proportion of assets being
intangible, management is
expecting to incur significant
legal fees involving resolution,
defence and creation of IP.
Price to Earnings (P/E)
 When compared to the
industry, Time Warner has
had an inferior price to
earnings ratio in each of the
past 10 years as shown in
Exhibit 4.3.
 A negative EPS of -11.21
during the crisis of 2008
meant that there was no P/E
ratio for that year.
 As share price has increased,
so too has Earnings per
share. This can be attributed
to the diminishing number of
shares outstanding in the
market as shown in Exhibit
4.1. EPS has increased in
each of the past 7 years with
the P/E ratio declining three
times in 2011, 2013 and
2015.
 Compared to its 4 major
competitors, Time Warner
has the second worst P/E
ratio with investors willing to
pay $13.74 for every dollar
as shown in Exhibit 4.2
Time Warner Inc
Comcast Corp
Time Warner Cable Inc
Walt Disney Co
Twenty-First Century Fox Inc
Price to Book Value (P/BV)
 Time Warner has the lowest
P/BV of any of its 4 major
competitors with investors
only willing to pay a 2.23
premium as opposed to Time
Warner Cable Inc’s 5.83, as
shown in Exhibit 3.2.
 Although Time Warner has
increased its price to book
value ratio consistently after
2008, it has however, lagged
behind the industry in each
of those years as shown in
Exhibit 3.3.

4. $0
$1,000,000,000
$2,000,000,000
$3,000,000,000
$4,000,000,000
$5,000,000,000
$6,000,000,000
$7,000,000,000
2016 2017 2018 2019 2020
Future Free Cash Flow for TWX
FCF
Current
Month
Last
Month
Two
Months
Ago
Three
Months
Ago
Strong Buy 8 8 8 8
Buy 20 20 18 18
Hold 10 10 10 10
Underperfo
rm
0 0 0 0
Sell 0 0 0 0
Recommendation Trends
Company Valuation
At present, Time Warner is undervalued relative
to its intrinsic stock price value. The company
valuation was fuelled by assumptions that I
made in part to reflect how past performance
can have an impact on future performance. This
why I chose a growth rate constant of 4.57% in
revenue as that was the 5 year average. With an
increasing free cash flow, Time Warner will
gradually start to see financial numbers it had
before the recession. With a cost of capital that
is less than its ROIC,Time Warner can expect
to see an increase in its stock price over the
coming years. Exhibit (?) shows further details
on how the valuation process was carried out.
Upgrades & Downgrades History
Analyst Opinion
Common consensus
amongst brokers is that
Time Warner is expected
to appreciate in value over
the coming years.
Moreover, 2 brokers
expect it to outperform
relative to the market
although neither one has
stated whether it expects
them to outperform their
industry peers. Given the
fundamental analysis
however, this would seem unlikely.
Figure 1.1 shows how optimistic people are about TWX.
Date ResearchFirm Action From To
Feb 5, 2016 Telsey Advisory Group Initiated Outperform
Jan 14, 2016 Drexel Hamilton Initiated Buy
Nov 5, 2015 CreditAgricole Downgrade Buy Outperform
Nov 5, 2015 BofA/Merrill Downgrade Buy Neutral
Nov 5, 2015 Wells Fargo Downgrade Outperform Market Perform
Oct 20, 2015 Pivotal Research Group Initiated Buy
Aug 20, 2015 Bernstein Downgrade Outperform Mkt Perform
Apr 28, 2015 CreditAgricole Initiated Buy
Mar 5, 2015 Deutsche Bank Initiated Buy
Jan 16, 2015 Stifel Downgrade Buy Hold