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Time Warner pleases Wall Street
Media giant reports better than expected results, boosts stock buyback, tells of AOL talks.
November 2, 2005: 12:08 PM EST
By Paul R. La Monica, CNN/Money senior writer
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NEW YORK (CNN/Money) - Time Warner Inc. reported better-than-expected third-quarter sales and earnings Wednesday, thanks to strong results in its cable and network television operations.

During a conference call with industry Street analysts, Time Warner CEO Dick Parsons confirmed that the world's largest media company is in talks with several companies regarding possible joint ventures or investments in its America Online unit. The future of AOL has been the subject of much speculation on Wall Street in recent weeks.

But what really had Wall Street buzzing was Time Warner's decision to boost its stock buyback program by $7.5 billion to $12.5 billion. Activist shareholder Carl Icahn has been pressing the board of the New York-based company to raise its share repurchase plan to $20 billion in order to lift the company's stock price, which, like other media stocks, has languished this year.

Stock buybacks, in theory, should boost a company's earnings power -- and hence its stock price -- since they reduce the numbers of shares outstanding. Some investors argue that repurchases are also psychologically important because it demonstrates that the company believes its stock is a value.

"The share buyback is a significant plus in that it retires stock at an inexpensive valuation and shows that management is highly confident and sets a level of support for the stock," said David Katz, chief investment officer of Matrix Asset Advisors, a New York-based money management firm that owns 2.9 million shares of Time Warner.

Parsons said in a statement that Time Warner boosted the buyback because of the company's "strong balance sheet, industry-leading free cash flow and solid earnings."

He added that even with the increased buyback, Time Warner would still be able "to invest meaningfully in future growth as well as to pay our regular quarterly cash dividend."

Thomas Eagan, an analyst with Oppenheimer & Co., said he was surprised the company announced an increase to the buyback so soon. He said he thought Time Warner would boost the share repurchase sometime next year, adding that Icahn's criticism probably forced Time Warner to act more quickly.

"Maybe the company felt the Street wanted to hear more about the buyback now. I would say that, if anything, what Carl Icahn's pressure may have done is expedite what the company was already thinking about."

A spokesman for Icahn was not immediately available for comment.

Shares of Time Warner (Research) rose more than 2 percent in early trading on the New York Stock Exchange.

But the stock is down more than 9 percent this year as investors have soured on media stocks in general over concerns about the Hollywood box office slump, and the growing migration of advertising dollars from television, radio and print to online media companies such as Yahoo! (Research) and Google (Research).

Catching the wave

Time Warner, like some other media companies, has taken steps to capitalize on the online advertising wave, however.

The company's America Online unit has made much of its content free to all Web users during the past year in a bid to attract more visitors. The strategy appears to be working. Advertising revenue in the AOL unit rose 28 percent from a year ago and that helped to lift operating profits at AOL by 16 percent. (Time Warner also owns CNN/Money, Fortune magazine and other media properties).

The recent strength in online advertising has also attracted the interest of several suitors. Microsoft's (Research) MSN unit is said to be in talks with AOL regarding a possible joint venture while a partnership of Google and cable firm Comcast (Research) has expressed interest in a minority stake in AOL's Web portal.

Yahoo! is also said to have talked with Time Warner about buying a stake in AOL.

During the call with analysts, Parsons admitted that Time Warner is in a range of discussions with several companies regarding the future of AOL. He declined to specifically name names, but said many of the companies have already been identified in news reports. He added that discussions are "fluid" and that it was premature to say whether any deal would result.

Still, the online ad gains at AOL were not enough to offset the continued erosion of AOL's dial-up subscriber base. Total sales at AOL fell 5 percent from a year earlier.

Looking at other businesses, Time Warner reported double-digit percentage sales increases in its cable business, thanks to strong subscriber gains for its digital cable and high-speed Internet access services, and its network television unit, which owns CNN and HBO. Time Warner plans to spin off a minority stake in its cable unit sometime next year. Icahn has been pushing Time Warner to spin off the entire cable unit.

Parsons said one of the company's top priorities was for Time Warner to complete its acquisition of some of the assets of bankrupt cable company Adelphia, and he stressed that the company had no plans to spin-off more of the cable unit than currently planned.

Sales in Time Warner's filmed entertainment division rose 6 percent from a year ago, despite Hollywood's woes, thanks to several summer movie hits such as "Charlie and the Chocolate Factory," "Batman Begins" and "The Wedding Crashers." Revenue from the company's publishing business rose 3 percent.

Separately, Time Warner disclosed in a filing with the Securities and Exchange Commission Wednesday that its Time Inc. publishing unit had received a subpoena from the United States Attorney's Office for the Eastern District of New York regarding an investigation into magazine circulation practices. The company said it is cooperating with the investigation and that has also informed advertisers that it is discussing is reporting of sponsored sales subscriptions with the Audit Bureau of Circulations.

Overall, sales rose 6 percent to $10.5 billion, surpassing Wall Street's estimates of about $10.4 billion. Net income jumped 80 percent to $897 million, or 19 cents a share. Analysts were expecting a profit of 18 cents a share, according to Thomson/First Call.

Time Warner also reaffirmed its profit outlook for 2005. The company said it expects adjusted operating income before depreciation and amortization to increase in the "high single digits" from last year's total of $9.9 billion.

The better than forecast results from Time Warner come a day after media rival Viacom (Research) also reported strong results and could be a sign of better days to come for the entire media group, especially since shares are so beaten down.

"The media sector is in the doghouse these days. You can throw a dart and find an undervalued stock," said Matrix's Katz, who believes that Time Warner's individual assets are worth about $25 a share, about 40 percent higher than the stock's current price. Katz's firm also owns shares of Walt Disney (Research) and Comcast.

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Will media stocks bounce back in 2006? Click here.

For a look at more media and entertainment stocks, click here.

Why are tech and media companies spinning off assets? Click here.

Oppenheimer's Eagan owns shares of Time Warner but his company has no banking relationship with the company.

The reporter of this story owns shares of Time Warner through his company's 401(k) plan.  Top of page

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