Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Time Warner Looking Good in Vain

Motley Fool Stock Advisor recommendation and entertainment giant Time Warner (NYSE: TWX  ) reported solid fourth-quarter results Tuesday. Revenue climbed 7% over the comparable year-ago quarter, while operating income rose 37%.

Double-digit increases to adjusted operating income came from the networks, filmed entertainment, and cable and publishing divisions -- that's everyone except AOL, and even AOL managed an increase of 4.9%. So, overall, business was looking good.

To discuss Time Warner, it helps to look at a five-year chart. Since early 2002, the stock has not traded above $20 a share, and it was hovering at $18.08 (up 4%) in late-afternoon trading Tuesday. That year, the bottom line showed a $98.7 billion loss. A lot has changed since then. For 2005, the company reports it had free cash flow of $4.4 billion (that's $0.94 a share).

Since that tumultuous 2002, the company has increased adjusted operating income before depreciation and amortization (adjusted income) every year, and 2005 has been the best year since. Time Warner also provided its 2006 outlook, calling for a "high single digits" increase in adjusted income and a 35% to 45% conversion of that income into free cash flow.

So what is there not to like? Well, if you're investor activist Carl Icahn, there's plenty. He sees Time Warner as a $27 stock (that's 49.3% more than where it is trading this minute). He'd like to see the company carved up so its value is more obvious -- like Sumner Redstone did at Viacom -- creating a new, faster-growing Viacom (NYSE: VIA  ) and a slower-growing CBS (NYSE: CBS  ) .

But listen to Tuesday's conference call, and you get every indication that the company plans to do things its way. Yes, Time Warner has implemented one Icahn idea. Under a $12.5 billion buyback program, scheduled to run through August 2007, $3 billion in stock has been purchased. There's only one problem. To be kind, all that buying isn't moving the stock.

The problem at Time Warner is this: The stock is selling for 20.4 times 2006 estimated earnings, and analysts expect the company to compound earnings by 11% a year for the next five years. There are fantastic brands within Time Warner, and this supersize company is producing big free cash flow numbers. But at the current earnings multiple, I just can't see the growth rate supporting a significantly higher price.

Motley Fool founders David and Tom Gardner recommend two companies for your consideration every month in theStock Advisornewsletter. Try a satisfaction-guaranteed subscription today.

Fool contributor W.D. Crotty does not own any shares in the companies mentioned.Click hereto see The Motley Fool's disclosure policy.

Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 511085, ~/Articles/ArticleHandler.aspx, 10/26/2016 11:44:45 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,219.17 49.90 0.27%
S&P 500 2,145.26 2.10 0.10%
NASD 5,272.81 -10.59 -0.20%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/26/2016 11:29 AM
CBS $56.40 Up +0.41 +0.73%
CBS CAPS Rating: ***
TWX $87.99 Up +0.83 +0.95%
Time Warner CAPS Rating: ***
VIA $42.07 Up +0.22 +0.52%
Viacom CAPS Rating: ***