Street heats AOL TW

Smith Barney upgrades stock as results improve

Smith Barney Wednesday upgraded AOL Time Warner, betting the stock “may get more in sync with its media and Internet peers” — the latest bullish research report on the conglom over the past two months. As Vivendi Universal hogs the spotlight, AOL TW has been quietly wooing Wall Streeters who’ve apparently grown convinced that the worst is over.

About this time a year ago, AOL Time Warner was bombarding the market with negative news: huge charges, weak earnings, federal inquiries, executive turmoil, shareholder lawsuits and a decimated stock. The shares drooped to an ignominious low of $8.70 last July.

They’ve soared 75% since then, closing Wednesday at $15.27.

The shift in sentiment started April 23 after an upbeat set of first-quarter financial results. The rich $2.1 billion sale of a 50% stake in Comedy Central to Viacom was announced the same week.

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Upfront success

Then, the WB net scored in the television upfront in May. And late that month, AOL TW announced an unexpected cash windfall from Microsoft when the software giant handed over $750 million to settle a lawsuit. As a result, the company has stabilized its “earlier precarious balance sheet situation,” wrote Smith Barney analysts Jill Krutick and Lanny Baker.

Earlier in June, Richard Greenfield of Fulcrum Global Partners reiterated a buy rating on AOL TW and called the stock “meaningfully undervalued at current levels.” JP Morgan, Bear Stearns, Merrill Lynch, Morgan Stanley and others piled on with cautious praise. They say Warner Bros. is firing ahead and America Online is steadier. They’re looking for strong numbers for the second quarter.

Earnings are due out the week of July 21.

Good housecleaning

Many credit chairman-CEO Richard Parsons with taking solid steps to shore up the company’s finances and morale and restore credibility. Wall Streeters and company insiders praise his decision to promote former star division heads Jeff Bewkes from HBO and Don Logan from Time Inc. to what are basically co-chief operating positions. Some of the bitterest employees have left or grown tired of complaining. Rage magnets Gerry Levin, Bob Pittman and Steve Case are gone.

Case is still on the board of directors.

Odd as it sounds, there are even some happy AOL TW investors. After all, if you bought at $8 and sold at $12, you made a bundle.

But a big overhang remains: Ongoing investigations by the SEC and Dept. of Justice. If the agencies find wrongdoing, it will give a big boost to shareholder lawsuits and could result potentially result in billions of dollars in damages.