Time Warner (TWX) ended 2016 on a strong note, as fourth-quarter results came in ahead of expectations with strong affiliate fee and HBO growth. We are maintaining our wide moat rating and our $96 fair value estimate, which is based on our expectation that the deal with AT&T is more likely to be completed than dissolved. If the deal were to be terminated, our stand-alone fair value estimate for the firm would remain at $85.
Revenue at Turner increased 7% year over year to $2.8 billion as subscription revenue increased 14% despite strong foreign currency headwinds. Domestic ad revenue was flat despite a tough comp from the Major League Baseball playoffs last year. Revenue growth more than offset a 20% increase in marketing costs from supporting the new shows and the rebranding of TNT. Thus, the operating margin at Turner improved to 30% from 29% a year ago. HBO revenue growth of 6% was driven by continued subscriber growth on both the traditional and over-the-top, or OTT, platforms along with strong home-video performance. HBO’s OTT offering now has over 2 million subscribers in the U.S.
Warner Bros. revenue improved by 17%, driven by theatrical revenue growth of 29%. The film slate for the quarter included "Fantastic Beasts," which grossed over $800 million globally. With four planned sequels, the J.K. Rowling-penned movie appears to be the next global film franchise for Warner Bros. In 2017, DC Films has an important slate of films (including "Wonder Woman") in the latest attempt to create its own version of the Marvel Cinematic Universe. Adjusted operating margin for the firm improved by 250 basis points versus last year to 22.3% as revenue growth offset increased content investment across the firm.
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Neil Macker, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.