'Core' of the matter
Analysts reassess TW non-cable opsWith Time Warner Cable shares having traded on the stock exchange for more than a month now, Wall Street continues to discuss the implications for the valuation of parent Time Warner Inc., whose stock has remained above the $20 mark for most of the year but has recently been under some pressure.
Stimulating some debate, Citigroup analyst Jason Bazinet argued in a report last week that "the Street's ignoring the most attractive part," the "core" TW operations, which include AOL and its filmed en-tertainment unit, as well as the networks and publishing divisions.
"Since AOL announced its new strategy in August 2006, movements in TW's share price have been 96% correlated to Comcast's share price," Bazinet pointed out. "However, less than 40% of TW's enterprise value is derived from cable." He argued in favor of a revaluation of the core media and entertainment assets, which he called "inexpensive."
The core TW has a 2008 free cash yield of 7.1%, the highest among media stocks, according to Bazinet. "In fact, the 'core' of TW is valued about 30% below the average media stock," which has a 5.2% free cash yield.
Overall, Bazinet maintained his "buy" rating with a $24 price target.
Meanwhile, Merrill Lynch analyst Jessica Reif Cohen recently cut her target for TW by $1 to $26, "reflecting our updated TWC valuation and estimates."
This is "a comeback year for operations/earnings," she argued, reiterating her "buy" rating. After all, "the recent sell-off provides an attractive entry point for the stock, which should benefit from improved financial results and continued shareholder returns."
Pali Research analyst Richard Greenfield also recently used updated TWC estimates to adjust his TW projections, but he came to a more bearish conclusion.
"Without a meaningful increase in the valuation of TWC (which we are not anticipating), the valuation on the remaining TW assets is not compelling given little to no growth," he argued.
Goldman Sachs analyst Anthony Noto also recently said his TWC financial model doesn't change his $25 price target and rather unenthusiastic "neutral" rating on TW shares.
However, further sales or spinoffs of such assets as AOL or the publishing unit over the next 12-18 months could boost TW shares again, Bear Stearns' Spencer Wang suggested last month in upgrading them to "outperform."