Time Warner Roll Slows

Third-quarter results fail to add fuel to its recent stock rally.
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Updated from 6:55 a.m. EST

Third-quarter results from

Time Warner

(TWX)

that fell short of expectations failed to add fuel to the rally that has pushed the media giant's stock price up 21% over the last three months.

The world's largest media conglomerate on Wednesday posted a huge spike on its bottom line, but much of the gain resulted from asset sales and adjustments related to its deal to acquire cable systems from Adelphia.

Excluding that one-time item, the results didn't do much to impress investors, though the company backed its outlook for 2006 results and is continuing with its massive share buyback.

Time Warner -- owner of AOL, Time Inc., Warner Bros. and HBO -- reported net income of $2.3 billion, or 57 cents a share, up sharply from the $853 million, or 18 cents a share, it recorded for the same quarter last year.

The earnings included 23 cents a share from discontinued operations related to cable systems that Time Warner handed off to

Comcast

(CMCSA) - Get Report

during the quarter in a three-way deal related to Adelphia's assets.

Another 14 cents a share came from the sale of Warner Bros.' Australian theme park business.

Excluding special items, Time Warner reported earnings of 19 cents a share, compared with 17 cents a share last year.

On that basis, analysts were expecting earnings of 20 cents a share, according to Thomson First Call.

The company's top-line results also disappointed.

Time Warner logged a revenue gain of 7% to $10.91 billion from last year's $10.24 billion.

Analysts were expected revenue of $11.07 billion.

Shares of Time Warner recently were down 12 cents, or 0.6%, to $19.89.

For the full year, the company reiterated its previous target of low double-digit growth in operating income, excluding the impact of the Adelphia transaction and other one-time items.

AOL, its Internet business, posted a 21% gain in profits even while

revenue dropped 3% as it slashed marketing spending for its shrinking dial-up service business.

AOL, which joined Time Warner as part of an ill-fated merger at the height of the stock bubble in the late 1990's, is directing its business model away from subscriptions to online advertising, an approach that has paid off for rivals like

Google

(GOOG) - Get Report

,

Microsoft

(MSFT) - Get Report

and

Yahoo!

(YHOO)

.

This summer, AOL plans to offer services, like email, for free.

At Time Warner Cable, revenue rose 44% from a year ago to $3.2 billion, reflecting the Adelphia deal.

Operating income rose 17% from a year ago to $550 million.

Last month, the company filed for an initial public offering of 16% of Time Warner Cable stock, with proceeds from the sale going to Adelphia creditors.

The increase of 33,000 basic video subscribers in the historical Time Warner Cable systems represents a 50% increase compared to the increases in the prior-year quarter, as well as in the second quarter of 2006.

In the acquired systems, basic video subscribers declined by 30,000 during the quarter. Digital video subscribers were 7 million at the end of the quarter, representing an increase of 143,000 subscribers in the historical systems and a decline of 7,000 in the acquired systems.

Residential high-speed data subscribers rose by 214,000 in Time Warner Cable's historical systems.

This represents the fifth consecutive quarter in which net subscriber additions surpassed 200,000. Total residential high-speed data subscribers at the end of the quarter were 6.4 million.

Elsewhere, the company's network division posted a 4% rise in revenue to $2.5 billion, reflecting higher subscription and advertising revenue.

Its publishing division reported a 1% gain in revenue to $1.26 billion, driven by higher online advertising revenue.

The company said it is currently narrowing down offers for the 18 magazines it plans to sell in the division.

Meanwhile, Time Warner's filmed entertainment division saw its revenue fall 10% to $2.39 billion, hurt by declines in theatrical revenue from the year-ago quarter, which included hits like

Wedding Crashers

and

Batman Begins

.

Laura Martin, an analyst with research firm Soleil-Media Metrics, says that despite some disappointments in third-quarter results, the recent rally in Time Warner shares won't end now.

She says the company's film and entertainment business is set for a rebound next year, and the spinoff of Time Warner Cable will be a positive catalyst for the stock.

Also, Martin believes the AOL business will either be fixed or sold within the next 12 months.

"Either way, AOL will stop being an overhang on this stock soon," says Martin, who rates the stock a buy.

Martin doesn't own shares of Time Warner, and her firm has no business relationship with the company.

Time Warner's recent stock gains were a long time coming for shareholders.

If the increase is sustained, Time Warner CEO Dick Parsons' long-term strategy could be vindicated after his leadership came under fire from well-known activist investor Carl Icahn early this year.

Icahn waged a campaign of public criticism against Time Warner's management and called for the company to take on debt and return cash to shareholders.

His overtures were largely rebuffed, but the media giant did agree to repurchase $20 billion worth of its shares.

It has bought back 770 million shares this year through Oct. 31 for $13.4 billion, and it plans to buy back as much as $15 billion worth of stock for the whole year.