03 November 2005

TWX Update - "They're all coming together at a classic bottom."

Considering my "unleashing shareholder value" digression in the previous post, I really should be sleeping right now, dreaming up some more bizarre blog fodder.

But I had to surf on over to the New York Times before going to bed. And there it was, an expectation of record free cash flow at TWX!

Time Warner has said it expects record revenue and free cash flow in 2005, and yesterday reported an 80 percent increase in third-quarter earnings. Until media stocks regain favor, Mr. Parsons said, all he can do is manage his company's businesses and capital for growth.

Aryeh Bourkoff, who follows media companies at UBS Securities, said that media stocks were generally trading around 15 times next year's free cash flow. (Free cash flow is the money left over after companies pay all their cash expenses, including taxes. Investors often use this as a performance gauge because free cash flow is effectively what is left to pay investors.)

By that measure, the stocks are not expensive, offering media investors an effective return of about 6 percent.

But that has not alleviated worries about the future, particularly because companies are still struggling to figure out, among other things, a model for selling content over the Internet or on cellphones. And investors recall the many wayward Internet investments that big media companies made late in the dot-com boom, most notably the financially disastrous combination of America Online and Time Warner.

Okay, so it's your typical journalistic "on one hand, but on the other hand." What I see is, in spite of the boffo earnings and cash flow, Wall Street still has the bitter taste of the AOL merger in its mouth. Eventually, these bad memories will subside, especially if Parsons continues to deliver quality results.

The article closes with a value investor's, or any investor's wet dream, the discovery of a market bottom. Yes, I do recognize the innuendos inherent in the line, "They're all coming together at a classic bottom."

Mario J. Gabelli, chief executive of Gamco Investors, whose mutual funds own shares in numerous media companies, is betting that prices will rise when leveraged buyout firms begin making more acquisitions in this area.

"What we need is a transaction of an L.B.O. group coming in and reconfirming some multiples here," Mr. Gabelli said.

But the situation may get worse before it gets better. Eventually, though, new opportunities are bound to emerge.

"The market is just dumping these stocks en masse," Mr. Gabelli said. "They're all coming together at a classic bottom."

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