Warner reassessed

Studio's undervalued at AOL TW share price

Don’t judge a book by its cover.

At parent company share prices, Warner Bros. may be drastically undervalued, so long as the unit remains buried within AOL Time Warner, according to an investor research report from Thomas Weisel Partners.

The San Francisco-based bank maintains that hidden assets like DC Comics along with a prolific TV production arm and hit-laden film slate should make the Time Warner unit worth up to 50% more than current prices suggest.

While hardly news to entertainment biz and Time Warner insiders still fuming at the ill-fated marriage to Internet cautionary tale America Online, it’s a message Wall Street media bulls are anxious to impress upon investors as the company weathers online subscriber losses.

Hidden advantage

“How much is a company worth that grew (cash flow) by 28% and 21% in the past two years and grew by 39% in the first quarter of 2003 with a strong outlook for the rest of the year?” analyst Gordon Hodge rhetorically asked in his Friday research note on the company. “If it’s a movie studio buried within a troubled behemoth such as AOL Time Warner, not very much apparently.”

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According to Hodge’s breakup valuation (a common technique used to value a company based on the potential trading values of its component parts), the market may be valuing Warner Bros. and New Line at a measly $3 for every $16 AOL Time Warner share. At a more industry-standard multiple of 17 times its cash flow of $1.38 billion, the Warner Bros. division should account for at least $5 per AOL TW share.

Picking apart the buried treasure reveals a highly misunderstood media conglom — a viewpoint that AOL Time Warner’s communication staff has been desperate to communicate in recent months.

Comicbook publisher DC may be one of the company’s most undervalued assets. With claim to such characters as Superman, Batman, the Flash and Wonder Woman, DC has 26% of the comics market compared with market leader — and stock market darling — Marvel Enterprises’ 32%. Warner is believed to be planning several superhero pics in future years, including a Batman prequel.

Standing staunchly behind the “content is king” mantra, Weisel and others bullish on AOL TW point to one of the healthiest filmed entertainment divisions in the business. Though early in the summer season, worldwide B.O. from Warners and New Line is already 66% up over the same period last year, with Hodge forecasting a 100% gain for the month of June alone, thanks to the $248 million U.S. haul for “The Matrix Reloaded.”

Frog leaps, bounds

The Weisel report also noted that WB was the hottest TV network in the recent primetime upfront market, with reported 20% CPM gains and estimated 23% dollar increases, while the Turner cable nets look on track to post 10% ad gains next year.

Even recession-hit publishing is performing well, with magazine ad rev at Time Inc. up 11% for the year, according to industry sources.

The bank believes that AOL TW’s fundamentals outweigh all the headline noise associated with the ongoing Securities & Exchange Commission and Justice Dept. investigations into the company.