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Hawk’s Vision

Time Warner (TWX) Upside Calls Attractive with Further Re-Org. Potential

Feb 24, 2014

Time Warner (TWX) shares have been fairly quiet with many of the top media names like Disney (DIS) and CBS Corp (CBS) rallying sharply to new highs.  It’s a name worth a look at this level looking forward the next 6 months, and will break it down below on each degree of analysis.

Fundamental:

Time Warner (TWX) has a $58.63B market cap and trades 14.36X earnings, 1.97X sales, 1.96X book and 28.77X FCF with a 1.77% dividend yield, and 15% forward EPS growth projected.  TWX has a record of consistency posting 5 straight years of double digit EPS growth, and in 2013 FCF rose 20%.  TWX also recently raised its dividend 10% and announced a $5B buyback.

Now, the value I see in TWX is that when looking at its report it clearly is segmented into 3 companies, Turner Broadcasting (TV), Home Box Office (Premium TV), and Warner Brothers (Movies).  Time Warner has already decided to spin-off it’s publishing segment, Time Inc., and I think it could easily decide to spin-off one of its segments, most likely Warner Brothers to focus more on TV (recent new investment into a sports network), and after recent Box Office success (Lego Movie, The Hobbit, Gravity).

Analysts target include FBR Capital at $85, Bernstein at $73, and Wells Fargo at $75.

Institutional Ownership:

TWX is a #9 holding at Dodge & Cox, #6 holding at Viking Global, and #9 holding at Longview Partners, notable gurus.

Technical:

TWX recently put in a strong reversal hammer bottom on a re-test of its former 2013 top breakout, and also held near support that was created in August 2013, still in a strong uptrend.  TWX shares are currently consolidating below its 20 week EMA, and a move above $65.50 sets up for a measured move out of this small cup and handle forming to $70 for the chance to make a run through its highs.

Options Activity:

TWX has seen some notable upside positioning in calls that remain in OI:

  • 5,000 July $72.50 calls bought to open $0.78 to $0.80 on 2-6
  • March $67.50 Calls Bought to Open 15,000X on 1-27 at $0.52
  • 7,000 April $70 calls in OI from a series of buys

TWX options are fairly cheap with IV30 at 19.2%, the 29th percentile for the past year.  The July $67.5/$75 call spread at $1.50 is a nice reward/risk strategy.

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