By Kenneth Li - Analysis
NEW YORK (Reuters) - Time Warner Inc (TWX.N) stock looks like a good buy again. It is trading at an attractive valuation compared to peers, and its film, cable and Internet divisions are undergoing a revival.
For the shares -- which have languished around $20 -- to rise 20 percent to 40 percent, analysts say Chief Executive Richard Parsons must make bold decisions, including when to hand the reins to Chief Operating Officer Jeffrey Bewkes.
Analysts have urged some aggressive moves for the company, such as selling its Time Inc publishing unit, spinning off Internet division AOL, selling more of its Time Warner Cable Inc TWC.N stake, or buying back another big chunk of stock.
Aside from a buyback, many analysts do not expect Parsons to take those actions. The CEO, who has received high marks for steering the company through a painful period of a U.S. government investigation, managing warring fiefdoms, and getting its businesses growing again, is now seen as a conservative leader.
“With a new CEO in place and a new agenda, it could accelerate any or all of those decisions,” said Christopher Marangi, an associate portfolio manager at Gabelli Value Fund, which owns Time Warner shares.
Time Warner, the New York-based owner of the Warner Bros. movie studio, AOL and People magazine, has said little on when Parsons would make his next move -- either leaving the company or moving into a non-executive chairman role. His contract expires on May 15, 2008.
Parsons’ next step and how the company aims to jump start its stock price will likely be discussed at a board meeting on Thursday in New York, institutional investors said.
A spokesman for the company said the board meeting was routine and declined to give details on what may be discussed.
Time Warner’s “conglomerate structure simply needs to be undone,” said Pali Capital analyst Richard Greenfield, noting the stock could hit $25 if the company dumps Time Inc., and splits or sells off AOL and Time Warner Cable, of which it owns 84 percent.
The board meeting “will hopefully set in motion some of the structural changes we believe are required,” Greenfield said.
The stock jumped 20 percent in the second half of 2006, but has fallen 7 percent this year. Shares fell 3 cents to $20.44 on the New York Stock Exchange on Tuesday.
Time Warner has nearly completed a $20 billion stock repurchase program after warding off billionaire investor Carl Icahn’s bid to break up the conglomerate last year.
“I think it’s likely the company will continue to repurchase a significant amount of stock, and there remains a possibility that the company will spin or sell one or more segments,” said Larry Haverty, associate portfolio manager at Gabelli & Co. He sees the stock rising to the high $20s.
Pali’s Greenfield said he hoped Time Warner would spend some of its anticipated free cash flow of over $4 billion this year and $5 billion next year on a new $14 billion buyback program.
Parsons has said the company would review AOL’s progress by the end of this year. Analysts speculated that could result in anything from staying the course to spinning off AOL or merging it with another Internet company, such as Yahoo Inc YHOO.O or Microsoft Corp (MSFT.O).
Time Warner said it reviews its options on a regular basis, but has no imminent plans to spin off or sell AOL or Time Inc.
AOL has actually been acquiring assets, most recently agreeing on Tuesday to buy online advertising company Tacoda.
Without more guidance, however, investors are left to worry that Time Warner may miss out on the hot mergers market.
Time Warner shares are trading at a discount versus its peers despite improved operations. Sanford C. Bernstein puts the stock at 14.5 times estimated 2008 earnings, or a 9 percent discount to the broader market and a 7 percent to 15 percent discount to U.S. media companies.
Time Warner Inc “has never been this cheap in the limited 7 month history of a publicly traded Time Warner Cable,” Bernstein media analyst Michael Nathanson wrote last week in a note to clients, referring to the cable unit’s New York Stock Exchange debut.
Some shareholders say the stock, even without word on Parsons’s future or any short-term transactions, is a good buy because of improved operations.
Supporters point to big box-office hits, such as the latest Harry Potter movie, “Oceans Thirteen” and “300” as well as continued cable subscriber growth.
Ad sales have gained 40 percent or more at the restructured AOL for four straight quarters, and the unit is believed to have taken market share from Yahoo, although Time Warner has said it probably will not end the year with the same increases.
In a bid to boost business, Time Inc has pushed more content on the Web and on mobile devices. On Monday, its Sports Illustrated magazine invested in high-school sports social network Takkle Inc.
“I believe it’s a very attractive piece of paper,” said Morris Mark of Mark Asset Management, which owns Time Warner shares. “It’s cheap, it’s growing, and there’s been a distinct improvement in the structure of management.”
Time Warner is due to report second-quarter results on August 1.