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By Matthew Coffina, CFA | 06-09-2015 03:00 PM

One of the Best Media Companies to Own Today

Time Warner is well positioned in the changing media landscape, says Morningstar's Matt Coffina.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. I'm here today with Morningstar StockInvestor editor Matt Coffina. We are going to talk a bit about his recent purchase of Time Warner (TWX) and why he thinks it's well positioned in a changing media landscape. Matt, thanks for joining me today.

Matt Coffina: Thanks for having me, Jeremy.

Glaser: So, you've talked in the past about how media is kind of undergoing this secular change right now, going through a lot of different changes. Can you just tell us a little bit about what some of those changes are?

Coffina: Sure. I definitely wouldn't downplay the changes that are going on in media, and I think this is really a once-in-a-generation shift driven by technology. We've already had, for a number of years, digital video recorders, which enable consumers to skip through advertisements, for example. Somewhat more recently, over-the-top services like Netflix (NFLX) that enable you to watch exactly what you want, when you want over the Internet. There's been an increasing trend toward on-demand watching, in general, where consumers are not necessarily sitting down to watch a show at any given time. They just want to record it or get it through an over-the-top service and watch it when they want.

This is going to have profound impacts, in my view, on the media industry. And I think there will be winners and losers. I bought Time Warner recently for our Hare portfolio because I think it's going to be among the winners. I think it has one of the strongest moats in media. It's right up there with companies like Disney (DIS) and, to a lesser extent, FOX (FOX) as having a relatively strong competitive position.

Glaser: Let's take a deeper dive on that. One of the threats is certainly the decline of traditional advertising. Why do you think Time Warner is better positioned here?

Coffina: I'm a big believer in the shift to digital advertising. It won't happen overnight. You're not going to lose all of the advertising that has been on TV and have it all go to digital; but we own, for example, Google (GOOG) and Baidu (BIDU) in the Hare portfolio, and that's a play on digital advertising, where we think, steadily over time, digital ads will gain share from traditional media and TV advertising, in particular--which has been largely untouched until now, I think, is going to start to gradually give way to more digital advertising.

The good thing about Time Warner, on this front, is that advertising is only about 16% of overall revenue. So, that's definitely at the low end relative to peers. You have other companies like Discovery Communications (DISCA) or Scripps Networks (SNI) that are much more highly dependent on advertising. It might be 50% of their revenue. Also, companies that own broadcast networks, in general, are much more dependent on advertising.

Time Warner, in contrast, gets more affiliate fees--HBO subscriptions, content licensing fees from Warner Brothers. Those revenue sources, I think, are much more insulated from this shift in advertising spending. So, for advertising, I don't have high hopes for growth; but even if advertising spending steadily loses a percentage point or two of share every year, the overall ad market is growing, so we might still be looking at stagnant ad revenue. It's not initially going to outright decline; it might just lose market share steadily to digital over the years. And then the fact that it's a small percentage of Time Warner's overall revenue is what really gives me confidence to say that it's a headwind that can be overcome.

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