(FORTUNE Magazine) – The din of criticism was positively deafening. Whenever media insiders and Wall Street heavies would gather in the spring of 1996, whether at cocktail parties or investment conferences, the talk would turn to Time Warner Chairman and CEO Gerald Levin and his company's sagging stock. At banquet tables in New York's poshest hotels, money managers would bemoan their losses in Time Warner stock and skewer Levin right along with their medallions of veal, recalls Porter Bibb, a veteran investment banker. "The complaints were relentless and quite personal," says Bibb. "Day after day, you'd hear Jerry just wasn't up to the job."

When Levin's name came up at meetings of Wall Street analysts, the first question was: How long would it be before he was forced out? "It was almost like a betting pool," says longtime media stock tracker Harold Vogel of Cowen & Co. "One person would say a year, and another would say, 'No, Levin's only got six months.' "

The business press was just as harsh. Forbes declared in May 1996 that the company "cannot survive in its present form." FORTUNE noted that Levin was "risking his very own neck" in the 1995 deal to buy Turner Broadcasting.

But nothing changes the hearts and minds of Wall Streeters like a rising stock price. Today, shares of Time Warner (which owns Time Inc., the parent of FORTUNE) are at an all-time high, and Wall Street can't say enough nice things about Gerald Levin. The same market insiders who once considered him aloof, ineffective, and unmotivated now routinely describe him as strong, decisive, and farsighted. And Levin is now in talks with Time Warner's board about extending his contract, which is set to expire in early 2000.

Even by Wall Street standards, where reputations can follow a trajectory as volatile as that of any stock, the fall and rise of Gerald Levin is remarkable. Bibb himself admits he complained openly in 1996 that "Jerry was drifting, and the company was drifting with him." Today, Bibb is singing a very different tune, calling Levin's recent performance "phenomenal." Time Warner stock spent most of the 1990s as a wallflower at the bull market ball. While the S&P 500 index jumped 59% between December 1993 and December 1996, shares of Time Warner actually fell 15%. Since then, however, Time Warner stock has gone from $38 to near $70, and many analysts are predicting it will soon climb into the mid-80s.

What accounts for the turnaround? The conventional wisdom on Wall Street says it's the sharply improved performance of Time Warner's cable operations, rapidly increasing free cash flow, the successful acquisition of Turner Broadcasting, and the growing sense that Levin--with the strong backing of Ted Turner--is finally large and in charge. That has all contributed to the rise in the stock, to be sure, but there's more to this story.

For starters, as befits a company whose bread and butter is entertainment, Time Warner has been making a slicker, more sophisticated effort to capture Wall Street's fancy. And there are factors beyond the control of Levin and the other executives on the 29th floor of Time Warner's Manhattan headquarters, chief among them the sharp turnaround in the cable industry.

In 1994 and 1995, when cable industry cash flow turned negative, Wall Street treated the business "as if cable caused cancer--everybody thought it was bad," says Time Warner President Richard Parsons. But since then, looser regulation from Washington, the fading threat of Rupert Murdoch's direct satellite effort, and cable rate hikes have dramatically enhanced cable sector performance and stock prices. In coming years, cable industry cash flow should jump by 11% to 13%, says Sanford Bernstein analyst Tom Wolzien. And that's crucial to Time Warner, which draws 40% of its cash flow from cable delivery.

Of course, Bill Gates also helped: The Microsoft chairman's decision to pump a cool $1 billion into Comcast last June amounted to a bet that cable companies could play a pivotal role in connecting American households to the Internet. The investment electrified Wall Street and pushed nearly every big cable stock sharply higher. In fact, Morgan Stanley analyst Rich Bilotti estimates that since Gates made his Comcast investment, the market capitalization of the cable sector has jumped $46.5 billion. Time Warner's market cap alone has increased by nearly $16 billion.

Despite the big run-up in the past year, Time Warner shares still have plenty of catching up to do. Over the past ten years, the S&P 500 generated an average annual return of 18%; Time Warner shares return-ed just 12.3%--and the company's shares trailed the S&P entertainment index by an even wider margin.

As the stock stagnated during much of the 1990s, Wall Street bitterness about the deal that brought Time and Warner together in the first place only mounted. Critics charged that Time's move to buy Warner Communications for $14 billion in 1989 and load up on debt, avoiding the highly conditioned $200 per share (presplit) bid from Paramount's Martin Davis, was proving a disaster for shareholders. Time Warner's massive debt only increased in the 1990s as Levin--who became chairman in 1993--spent billions more to acquire cable systems. It's easy to understand investors' anger: It took eight long years for Time Warner shares to climb to the equivalent of Davis' original $200 a share offer.

Executives within the company acknowledge the bitterness left behind by the merger and don't try to gloss over the long stretch of dismal stock performance. And despite the surging stock, the company still faces plenty of skeptics. Although its revenue jumped 18% in 1997, to nearly $25 billion, the company created by the merger of Time and Warner has yet to earn a single penny in annual profit. Plus, it's still saddled with a whopping $16.9 billion in total debt. Most investors aren't worried about all that leverage right now, but in the event of a business slowdown or a rise in interest rates, it would pop right back up as a big problem on Wall Street's radar screen.

Time Warner is expected to turn a tiny profit in fiscal 1998, but for now, Wall Street still measures Time Warner's performance by Ebitda, or earnings before interest, taxes, depreciation, and amortization. Ebitda is a common yardstick for highly leveraged entertainment and media companies with sizable debt-service costs, and it's been growing strongly at Time Warner, rising 25% in 1997.

More important, though, is free cash flow, which is the next best thing to actual profits. Put simply, free cash flow is money thrown off by operations that is not automatically captured by the capital budget. Salomon Smith Barney's closely watched entertainment analyst Jill Krutick predicts Time Warner's free cash flow could top $600 million in fiscal 1998, up from an estimated $100 million in 1997. In 1999, free cash flow should jump 100%, to roughly $1.2 billion. "Free cash flow gives this company the firepower to reduce debt and ultimately generate consistent, actual income," says Krutick. Already in 1997, the company reduced its debt by $850 million. Krutick expects a further debt reduction of $1.5 billion over the next two years.

Nevertheless, free cash flow isn't the same as actual profits, and until recently many experts have had a hard time figuring out just how much money the company was actually making. The company's intricate capital structure only made matters worse. Analysts on Wall Street, who get paid hundreds of thousands of dollars a year to crunch numbers, have frequently been overwhelmed by Time Warner's complexity. "Even today, an experienced analyst has to spend an inordinate amount of time studying Time Warner's SEC filings," says Cowen's Vogel. And that scared away some big Wall Street brokerages and large mutual fund managers, a major reason Time Warner shares were depressed until recently. Sanford Bernstein analyst Wolzien is more blunt: "A lot of people on the Street concluded that life is just too short to figure this baby out and avoided the stock."

That's where the savvier sales job of Levin & Co. has helped. Presentations at quarterly analyst meetings in the past two years "have become much more polished," notes Wolzien. "They made the story a lot more understandable. They sold the sizzle along with the steak."

Levin and Parsons have also started to emphasize their efforts to trim expenses, and this has gone over like catnip on Wall Street. Under prodding by Ted Turner, Time Warner sold off its collection of American art. The company has outsourced some auditing, saving $4 million per year. When studio gurus discovered that 30-second commercials for the company's movies were no more effective than cheaper, 15-second ads, Time Warner switched to the shorter spots. That move, says Parsons, saves tens of millions. With steps like these, Levin hopes to remove $700 million annually from the company's cost structure over the next few years.

Last but definitely not least on Wall Street's list of reasons to like Time Warner is Turner, the vice chairman, who owns roughly 12% of Time Warner's shares. In the past, the famously voluble Turner was better known as an empire builder than as a focused financial manager. Now, rightly or not, Wall Street sees him as an investor who is pushing for greater fiscal discipline and cost cutting within the company.

Analysts also say Turner is a showman whose style neatly complements that of the more bookish Levin. "Turner seems solidly behind Jerry, and people like that," says analyst David Londoner of Schroder & Co. "They make a good team."

Levin agrees. "I love working with Ted," Levin told FORTUNE. "He's one of the most interesting people on the planet." For his part, Turner says, "We just have a ball together, but I try not to waste his time."

Will Time Warner remain in Wall Street's favor? At the division level, things generally look good. Ebitda at the Turner networks jumped 21% last year, to $660 million, well above Wall Street estimates. Warner Bros. Ebitda increased 10%, to $601 million. And the publishing unit, which is often overlooked by analysts, managed to increase its Ebitda by 14%, to $608 million. That's quite an improvement from the single-digit growth of just a few years ago, says Wolzien. The standout grower, though, was the company's cable business. Excluding one-time gains, it posted Ebitda of $2.27 billion, a 16% jump. The only big loser was the long-troubled music unit, which suffered a 26% drop.

"With the exception of music, they've been pretty much hitting on all cylinders," says John Schreiber, an analyst with Janus mutual funds. "We think a sleeping giant has awakened." Schreiber had better hope so. As of the end of September 1997, Janus owned over six million shares of Time Warner, and Janus has kept right on buying, adding millions of shares in recent months, despite the rising stock price.

Naturally, Levin, Turner, and the rest of the Time Warner brass share Schreiber's optimism. So do many analysts on Wall Street. Krutick of Salomon Smith Barney says that the momentum of Time Warner's individual businesses in 1997 should continue. She adds that the rate of Warner Bros.' cash flow growth could more than double in the next 12 to 18 months, thanks to increased syndication profits and NBC's recent agreement to pay Warner a reported $13 million per episode for the TV hit ER.

Meanwhile, Levin has told the Street that the costly acquisitions of the 1990s, which pushed up debt still further and sharply diluted potential earnings (there weren't any to dilute at the time, you will recall), are over. He has told analysts that management is earmarking free cash flow for share buybacks and reduction of the company's debt.

The share buybacks are especially popular among Wall Streeters, who watched as Time Warner issued nearly 300 million shares of stock between 1991 and 1997, nearly doubling the company's shares outstanding. But the more important goal will be real and lasting debt reduction. Not only will that provide support for the stock, but it may enable Time Warner to get its credit rating raised from borderline investment grade to BBB by all the rating agencies. "I'm driven to achieve a solid investment-grade rating for the company," says Levin, who is unusually emotional on the subject of credit quality. "Nothing is going to stand in our way."

But investors have to wonder if the easy money has already been made in Time Warner shares, particularly because the company faces some big challenges in the coming years. One big worry is whether double-digit earnings growth from cable systems can endure. Tighter regulation from Washington or a downward move in cable rates would slam the stock, warns Wolzien. Although he doesn't see a sharp falloff in cable growth, Wolzien says he expects cable rate increases to slow in the coming year, which could crimp cable cash flow. Other observers worry that an Al Gore presidency could increase the chances that Washington would bear down on cable.

In the past some on Wall Street also worried about Time Warner's roughly 86 million outstanding stock options, but that number has been dropping as the stock has risen, and analysts now downplay the issue. "This is not a ticking time bomb," says David Londoner. "Everybody has it in their models."

A downturn in the red-hot ad market is another concern, according to Cowen's Vogel. "It's been so long since there was an ad recession that no one remembers it can happen," he says.

More fundamentally, critics question whether executives have fully succeeded in knitting together Time Warner's far-flung pieces, creating an enterprise that benefits from long-sought synergies. One company insider cites Time Warner's Internet efforts, arguing the company has failed to coordinate its mass of Websites and other online fare with more traditional businesses like Warner Music or HBO. He points to a Website called The Hub--a unit of New Line--which at one time was envisioned as an online music seller and content provider not unlike the now popular N2K.

The Hub is a joint venture between AOL and Time Warner, but insiders say Time Warner higher-ups didn't try to build up The Hub by yoking it to Warner Music or Columbia House, the music mail-order giant that's half owned by Time Warner. The lesson isn't one of lost money here. It's more a matter of a lost opportunity to create a business like N2K, which recently went public and now commands a market cap of roughly $300 million.

Time Warner responds that coordinating new-media business opportunities is high on the priority list. A senior company executive also notes that for every example like The Hub, "there are two projects that achieved higher profits simply because they were independent and decentralized."

Parsons also maintains that skeptics underestimate the appeal of the rapidly upgrading cable systems' broader choice of pay-per-view options and additional channels: "People are getting more choices and value, and thus are willing to pay more." And, says Parsons, those elusive synergies are being achieved. For example, a recent arrangement between Turner networks and Time Warner studios enabled TBS to show the movie Dumb and Dumber before broadcast networks like NBC, boosting ratings and ad revenue.

The final element in Wall Street's optimism about Time Warner lies in the potential of its cable lines to deliver high-speed Internet access. Cable modems let users connect to the Web at several hundred times the speed of conventional modems, but they've yet to live up to their potential. Analysts like Morgan Stanley's Bilotti, though, predict the company's Road Runner project could plug just under three million homes into the Internet by 2003. "In five years Road Runner could generate a billion dollars annually in new revenue," says Bilotti. "It's big."

Optimistic as analysts like Bilotti are, it's worth remembering that Wall Street is notoriously fickle when it comes to companies and their leaders. As Jerry Levin well knows, today's stock market darlings can fall from grace almost overnight. For now, though, Levin can take comfort in the newfound optimism about Time Warner's prospects. The 58-year-old chairman won't discuss his long-term plans or any possible successor at the helm of Time Warner. But Ted Turner says that Levin's "not going anywhere."

Adds John Schreiber of Janus: "Maybe Jerry Levin has had the last laugh."