It's Time for Time Warner

Time Warner is also attractive at the operating level. AOL and Publishing are going to struggle in 2009, with double-digit declines in advertising. The film and TV businesses should be flattish in 2009; cable networks remain the best-performing media assets, and Time Warner's nets have been leading the industry for more than a year. About 70% of Time Warner's operating income should be down no worse than 5% in 2009, a good performance relative to media and many other consumer discretionary sectors.

Long-Term Drivers

Time Warner will have one of the most attractive asset mixes among diversified media companies after the TWC split. Both the growth and free cash flow profile will be attractive. Eventually, AOL will be resolved, either by turning it around or (more likely) by selling it. Any outcome for AOL wherein Time Warner reduces its exposure is bullish.

Time Warner will also benefit long term from the relatively poor management over the past decade. Time Warner's margins are below peers such as Disney (DIS - commentary - Cramer's Take) and News Corp. (NWS.A - commentary - Cramer's Take), as is the consistency of its financial results at its film studios and cable networks. It seems backward, but the historically poor performance gives Time Warner more room to pull its financial results up to its peers, thus driving superior growth.

After the split, look for a big share buyback, material dividend, accretive acquisition or possibly a combination of all three. Depressed valuations across media dramatically reduce the risk that Time Warner uses its stellar balance sheet to make a dilutive acquisition.

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At time of publication, Birenberg was long TWX in personal and client accounts, although holdings can change at any time.

Steven Birenberg is president and chief investment officer of Northlake Capital Management, LLC. Northlake specializes in managing equity portfolios using a combination of exchange-traded funds and special situation stocks. Birenberg appreciates your feedback; click here to send him an email.