Time Warner: V for Vindication?
Strong cable and network TV results help lift Time Warner sales and profits, but concerns about AOL linger.
By Paul R. La Monica, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - Time Warner, the world's largest media conglomerate, reported first-quarter sales and earnings that were largely in line with expectations thanks to strong growth at its cable and network TV divisions and also reaffirmed its operating profit forecast for 2006. But will that be enough to lift the stock out of its funk?

Shares of Time Warner (Research) have been flat this year and have underperformed both the broader market as well as other media and cable rivals such as Walt Disney (Research), News Corp (Research). and Comcast (Research). (Time Warner is the parent company of CNNMoney.com).

Not a good
Not a good "Time": Shares of Time Warner have lagged the performance of other top media and cable companies so far this year.
DVD sales of
DVD sales of "Harry Potter and the Goblet of Fire" helped boost profits at Time Warner's film studio business.
Strong results from cable are lifting the overall financial performance of Time Warner.
Strong results from cable are lifting the overall financial performance of Time Warner.
INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER upgrades & downgrades earnings & warnings public offerings INVESTOR RESEARCH CENTER INVESTOR RESEARCH CENTER
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Time Warner stock sank more than 1 percent on the New York Stock Exchange after the release of the first-quarter results.

The company reported healthy gains in subscribers at its cable unit, leading to a 15 percent gain in sales and 17 percent increase in operating profits before depreciation and amortization. Specifically, Time Warner Cable posted robust increases in subscribers for newer products such as digital cable, high-speed Internet access and digital phone offerings.

"In my opinion, Time Warner Cable delivered the best quarter in its history," said Time Warner CEO Dick Parsons during a conference call with analysts Wednesday morning. He added that Time Warner and other cable companies are well-positioned to fend off threats from phone companies like Verizon and AT&T, which are looking to build their own networks to offer video services.

"While the phone companies are only just starting to dig up your yard, cable is already in your house," Parsons said.

Time Warner also posted decent results at its network TV business, which includes cable channels CNN, Cartoon Network, TBS and TNT. Sales increased by 3 percent while operating profits before depreciation and amortization rose by 7 percent. Results were mixed at the company's movie studio. Sales sunk 8 percent due to some disappointing results at the box office but operating profits surged nearly 20 percent thanks to strong DVD sales of 2005 hits "Harry Potter and the Goblet of Fire" and "Wedding Crashers."

AOL still a problem

But declining sales and operating profits at the company's AOL Internet unit continues to be a sore spot. Revenues sunk 7 percent from a year ago, due largely to a 13 percent decrease in subscription revenue. AOL finished the first quarter with 18.6 million subscribers in the U.S.. That's a decline of 835,000 from the end of 2005 and 3.1 million lower than a year ago.

AOL is starting to benefit from the boom in online advertising. Ad sales rose 26 percent from a year ago but advertising still represents just a small portion of AOL's overall sales. AOL has taken steps to increase traffic at the company's network of sites in order to become more competitive against the likes of Google (Research) (which last year agreed to buy a 5 percent stake in AOL) and Yahoo! (Research) The company began last year to put most of its content online for free. In the past few months has launched a new online video service called In2TV that features streams of old TV shows and has also unveiled a new Web site focusing on blogs about popular stocks.

During the call, Parsons stressed that AOL is seeing growing subscribers for broadband services and that the company hoped to have a better indication by the end of the year as to when the overall subscriber base will stabilize.

But Joe Bonner, an analyst with Argus Research, said Time Warner still needs to do more to turn around AOL since online ad growth is not enough to stem the overall sales and profit erosion at the unit. He added that until AOL shows more signs of improvement, Time Warner's stock may stay continue to founder.

"Time Warner has to turn around AOL. That's job one. The other assets the company have are doing well. Cable and the networks looked good but the problem is AOL," he said.

More acquisitions and deals?

Time Warner also posted disappointing results at its publishing unit. Sales were flat from a year ago while operating profits fell by 12 percent. Time Warner sold its book publishing division in the first quarter to French media firm Lagardere.

And during the call, Parsons hinted that Time Warner may soon make more deals. He said the company is in talks to buyout the 50 percent stake in cable channel Court TV that is owned by Liberty Media, the company controlled by mogul John Malone. Time Warner already owns the remainder of Court TV. Parsons added that Liberty, which owns a 4 percent stake in Time Warner, is also looking to exchange some of his Time Warner stock in exchange for some Time Warner businesses that Parsons said were not core, strategic assets.

Parsons would not comment on a question from an analyst about whether Time Warner was looking to make a bid for Spanish language broadcaster Univision, which put itself up for sale in February. He did say that Univision is a "terrific company" and that a company of Time Warner's size "looks at everything" but stressed that Time Warner had a lot on its plate right now and would only make deals that it felt would lead to a strong return on investment.

Despite the muted reaction to Time Warner's news Wednesday, one analyst thinks the stock could be due for a turnaround.

Thomas Eagan, an analyst with Oppenheimer & Co., said the strong results from cable,combined with similarly healthy numbers from Comcast last week, could buoy the shares during the next few months. Comcast and Time Warner are also in the process of teaming up to buy the assets of bankrupt cable company Adelphia, a move that most analysts think will further improve results at both companies.

He added that calls to spin-off a larger portion of the company's cable business to the public once the Adelphia transaction is completed will likely die down since cable is proving to be one of the better performing parts of Time Warner.

"With investor sentiment improving on cable, that should help Time Warner's stock," Eagan said. "The first-quarter results clearly show that the cable business helps the overall company grow," he said.

To that end, Parsons said that Time Warner is still committed to sell a minority position of Time Warner Cable to the public since a separately traded cable stock would allow Time Warner to have more flexibility to make future cable acquisitions. But he added that Time Warner wanted to retain operating control of the cable business.

Time Warner has also been aggressively buying back stock during the past few months in an attempt to boost shareholder value. The company said that it has bought back nearly 10 percent of its total shares, worth about $8 billion, since the company announced a buyback plan last year. Time Warner increased the size of the share buyback plan to $20 billion in February under pressure from activist shareholder Carl Icahn.

Icahn had been seeking a breakup of Time Warner into four separate companies but settled with Time Warner after his plan failed to garner significant support from large institutional shareholders of the company.

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Oppenheimer's Eagan owns shares of Time Warner but his company has no investment banking ties to the company. Bonner does not own Time Warner and his firm has no investment banking relationships 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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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.