AOL Time Warner shares surged Monday in a buoyant market as Morgan Stanley analyst Rich Bilotti gave the giant media conglom a much-needed vote of confidence ahead of its quarterly earnings this month and a planned cable IPO late this year.
Shares closed up 5.37% at $12.17, after jumping nearly 8% during the session.
Bilotti thinks the stock is worth at least $17 and no less than $14-$15 — even if America Online fails to turn around. In the worst case scenario, “We believe the AOL division could truly have zero value to shareholders,” he wrote in a note to clients. But meanwhile, he said, the division has cut costs significantly, and AOL TW’s traditional media businesses are holding steady. With the ad market and economy still uncertain, he noted AOL TW is less exposed to the advertising slump than its major competitors.
No fret over debt
Unlike many Wall Streeters, he’s not fretting over AOL TW’s high debt, which is pushing $30 billion. He figures an initial public offering of Time Warner Cable late in the year or a sale of assets will raise at least $2 billion, which would preserve the company’s investment grade credit rating. AOL TW is in final negotiations to sell its 50% of Comedy Central to Viacom and is mulling a number of bids for its book publishing division.
Its Atlanta sports teams also are on the block. Despite speculation, however, AOL TW isn’t likely to sell its half of Court TV.
Bilotti sees the conglom posting revenue of $9.6 billion for the first quarter ended in March and $42.2 billion for the year.
AOL TW is due to report its most recent financials April 23. Investors will be looking to CEO Richard Parsons for guidance on earnings, the status of the cable IPO, the progress of AOL and investigations into the company’s accounting by the SEC and Justice Dept.
If they like what they hear, it could herald a shift of sentiment on the battered stock. Shareholders will get to have their say at the company’s annual meeting in Washington, D.C., in May, when Steve Case plans to formally step down as chairman. Parsons will assume that title.
After several years of pain, AOL TW is at a crossroads this year as it tries to repair America Online, which is losing its traditional Internet subscriber base and needs to attract high-speed customers to survive. It has launched an aggressive marketing campaign to attract subs to its newly revamped service. But AOL TW isn’t likely to keep America Online much past 2003 if it shows no signs of a revival.
On the showbiz side, Bilotti sees AOL TW’s filmed entertainment revenue down 4%-5% in the first quarter due to fewer releases, and flat for the year — with a big potential upside bump from the next two installments of “The Matrix.” He sees full-year revenue growth of about 5% at both cable nets and publishing and expects music revenue to dip 3%-4%.
Other media shares followed AOL TW higher Monday, outperforming the broader market. Viacom rose 2.11% to $40.20 and Vivendi Universal was up 1.34% to $14.40. Walt Disney rose 1.72% to $17.74 and News Corp. gained 1.85% to end at $27.60. The Dow Jones Industrial Average added 23.26 points, or 0..28%, to close at 8,300 amid growing conviction that the war in Iraq will be over soon and successfully.