AOL Time Warner
got a big vote of confidence from Morgan Stanley Monday, as the firm resumed coverage with what amounts to a buy rating on grounds the company's asset-sale options and internal cash flow reduce its balance sheet risk.
The shares were up more than 7% to $12.40 in the Instinet premarket.
The brokerage said AOL trades at a fairly substantial discount to peers on a price-to-free cash flow basis, and set a price target of $17 based on expectations the AOL division will stabilize in 2003. Morgan Stanley said if worst-case bear scenarios persist and the division keeps losing money, the target price would be more like $14 a share.
The brokerage noted AOL reduced its spending commitments for network expansion by about $500 million in 2003 and said its diversification provides more earnings predictability and less exposure to advertising weakness than other media companies.
AOL has several asset-sale options that will help it maintain its credit rating, the brokerage said. It could complete the sale of Time Warner Cable in a stock offering by the end of the year, sell its cable system ventures, or sell its stakes in Court TV and Comedy Central. They said any one of the three would raise about $2 billion.