TWX Preview: Expect More Mediocrity

Time Warner (TWX - commentary - Cramer's Take) is expected to report another quarter of mediocre growth, with revenue gaining just 1.8% and earning before interest, taxes, depreciation and amortization (EBITDA) growing just 1.1%. A particularly poor performance by AOL is the problem as all the other divisions will show positive, if uninspiring growth.

Three things need to happen for Time Warner shares to recover:

1. Time Warner Cable's (TWC - commentary - Cramer's Take) valuation must expand. This could occur if investor sentiment toward cable stocks improves or if growth at the business picks up.

2. AOL must improve and show that it can be a growth asset. This will happen if traffic improves and is monetized.

3. The traditional content assets in Film and TV production and Cable Networks must more consistently generate hit content with tight cost controls. Disney (DIS - commentary - Cramer's Take) and News Corporation (NWS - commentary - Cramer's Take) have accomplished this, and the gap between their financial performance and Time Warner's leaves room for substantial improvement.

I am not optimistic that a restructuring of Time Warner will produce the required outcome. There is little value added at this point given how long the company has been looked at on a sum-of-the-parts basis. If the individual pieces were worth that much more than the whole, the shares would reflect it. Opportunity does lie in more focused management efforts, although recent performance at the segment level suggests operating management will have to show a higher level performance than previously revealed. Maybe a changed corporate culture as a result of a split from Time Warner and a resolution of AOL's future will provide the impetus. Valuation is cheap enough that it might be worth a bet.

Looking more closely at the first-quarter expectations, it should be a good quarter for Filmed Entertainment on the operating profit line, thanks to upside from DVD sales of the latest Harry Potter movie and decent performance for the film slate. Publishing will also have a strong profit comparison thanks partially to a write-off a year ago and to a culling of the list of magazine titles that leaves the business focused on larger and more profitable titles.

Cable will have a sluggish quarter compared to peers like Comcast (CMCSA - commentary - Cramer's Take) and Cablevision (CVC - commentary - Cramer's Take), with revenue and EBITDA growth in the 6% to 8% range. More focus will be on signs of further improvement in the Dallas and Los Angeles operations. These systems could drive future results on the upside once the turnaround efforts take root.

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At the time of publication, Birenberg was long Time Warner in a single client account and long Disney and News Corporation in several client accounts and in his personal 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.