Time Warner Inc. (TWX) was the brunt of a lot of jokes following its acquisition of AOL— the company made famous for dial-up Internet in the 1990s. And, that criticism was much deserved.
The stock crashed from $250 per share at the height of the Internet bubble to $20 per share following the 2008 financial crisis. It was all but left for dead. Perhaps coincidentally, in 2009 the company spun off AOL —a move that spurred the company higher. Shares have rebounded from that low to close Tuesday at $61.36 – three times higher.
RECENT ACTION
In the past 30 days, Time Warner has been trading in a consolidated range of $60.57 – $66.01. There has been an overhang of the stock by way of its blackout with CBS, a hiccup that was resolved earlier on Tuesday. During this time, the stock has been showing support around $58.90 and, besides one quick break above, resistance in the $63 range. The stock just crossed the 50-day moving average and also trades above the 200-day moving average. After its most recent earnings announcement, technical indicators also give us a bullish view on TWX.
A LOOK AT FUNDAMENTALS
TWX’s short-term bullish technical indicators are supported by strong fundamentals, as well. Time Warner, who owns HBO, CNN, and Warner Bros., posted an 87 percent jump in second-quarter net income.
Excluding some items, earnings were 83 cents a share in the period, surpassing the 76 cents that analysts predicted on average. Network advertising sales rose 11 percent, helped by the NBA playoffs on TNT and March Madness, the company said. Net income increased to $771 million, or 81 cents a share, from $413 million, or 42 cents, a year earlier. Revenue advanced 10 percent to $7.4 billion, topping the $7.1 billion estimate.
Potentially most important—the company increased its full-year forecast, saying adjusted earnings would see percentage gains in the “mid-teens” from a base of $3.24 a share.
Jeffrey Bewkes, TWX’s CEO, has focused growth on its TV business, which accounts
for more than 70 percent of operating income. He announced plans in March to spin off magazine publisher Time Inc. – the company’s worst-performing division – after other plans and talks fell through. The spinoff was originally slated for later this year.
TWX trailing price-to-earnings ratio stands at 16.49, below the industry average of 17.44 and below the S&P 500 average of 18.59. Though, the company’s valuation is above where we consider companies undervalued (sub-15 multiples). TWX’s current Price/Sales of 1.92 is above the average of its industry, of 1.13.
The stock’s intrinsic value is $68.33, suggesting that prices could gain more than 10 percent from current levels. At Tradespoon, we believe some of that move higher could come in the next month.
DEBIT CALL SPREAD
To take advantage of this gain, Tradespoon recommends a debit call spread in October calls. We recommend buying the October 2013 $60 calls and selling the $62.50 calls for a net debit of $1.37. As with any debit spread, your total profit would be capped at $1.20 if prices trade above $62.50 by the strike. Simultaneously, if prices are below $60, you risk the $1.30 per contract cost.
Now that the potential negative news surrounding its talks with CBS are out of the way, Time Warner will be set for another move higher.
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