TW’s downgrade dip

Analyst lowers Time Warner rating; stock drops 7%

Shares of Time Warner dropped nearly 7% Monday after Merrill Lynch analyst Jessica Reif Cohen lowered her short-term rating on the stock to “accumulate” from “buy.”

Reif Cohen, who has a large following on Wall Street, said her downgrade reflects a lack of near-term catalysts that could boost the shares as well as difficult year-on-year comparisons in the next two to three quarters. Her comments pushed the stock down by $4.56 to close at $62.25.

Levin ‘confident’

A Time Warner spokesman said the company was “perplexed by Merrill’s announcement.” In a statement, chairman-CEO Gerald Levin said management remains “confident with respect to the solid short-term and long-term outlook for our company.”

As the shares drifted lower, Morgan Stanley Dean Witter analyst Rich Bilotti reiterated a “strong buy” rating on the stock.

Time Warner shares recorded outstanding gains in 1997 and 1998 before slowing up a bit this year, Reif Cohen noted. Music has become “problematic,” she said, due in part to a decline in U.S. market share and the merger of Columbia House and CDNow. She thinks filmed entertainment could feel a squeeze from the loss of MGM’s homevideo distribution biz.

Still a long-term ‘buy’

She kept a long-term “buy” rating on the company, which she expects to post a 13%-15% increase in cash flow next year. And she praised the depth of management, breadth of assets and flexible balance sheet.

The one significant event that could drive shares higher, Reif Cohen said, is a restructuring of Time Warner Entertainment, or TWE, the company’s partnership with cabler MediaOne Group. MediaOne, which has agreed to be acquired by AT&T, recently ceded all management control over the venture to Time Warner, which owns 75% of TWE.