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Editor's note: The "Should I Do It?" column runs every Wednesday and is written by David Peltier, our value stocks expert. In the column, David takes a look at a value stock and explains if you should snap up shares or pass it over.Peltier is a regular on RealMoney and also writes Value Investor.

The two-year chart of

Time Warner's


stock price is the epitome of a narrow trading range. Shares have meandered between $15.41 and $19.90 over that time, with the stock closing near the middle of that range Tuesday at $17.55.

The media giant took its current form in a January 2000 megamerger, and investors have suffered ever since. Just about every contributor on



has commented on Time Warner at one time or another, and I myself was caught within the company's

value trap

at one time. Wall Street analysts are also in love with the stock, with 12 buy ratings, 9 holds and 0 sells, according to



Even so, the game changed at Time Warner last August, when famed investor Carl Icahn announced a public campaign to oust current CEO and Chairman Richard Parsons. Icahn has since enlisted the help of investment bank


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in an attempt to force a proxy fight.

With that in mind, I'm here to analyze the Time Warner situation, and answer investors' ultimate question: Should I do it? Can this stock be bought for an impending rise up through $20, or is Time Warner cursed to languish in the teens?

Icahn, who controls about 3% of Time Warner along with an investment group, fired his latest salvo in the battle with management this week. On Monday, the billionaire financier said he recruited former



CEO Frank Biondi to replace Parsons. Rumors are circulating that a scathing look at Time Warner's cost structure is coming next week.

Icahn and Parsons have met face to face, and current management has taken some steps to appease investors. In fact, the company responded to one of the financier's requests in November, doubling its authorized stock repurchase program to $12.5 billion.

The company's finances are undeniably strong. Time Warner generated some $6.8 billion of operating cash flow over the past four quarters, and reduced its long-term debt/common equity to 29.6% at the end the third quarter from 37.8% the year before. Also, the company initiated a 5-cent quarterly dividend (1.2% yield) several quarters ago, with the most recent payment declared on Jan. 26.

To watch David's video version of this column, please click here


The company reported fourth-quarter results Wednesday morning, with a conference call to be held at 8:30 a.m. The consensus analyst estimate was for Time Warner to report operating earnings of 22 cents a share on $11.9 billion of revenue, and it reported a profit of 25 cents a share with in-line sales. The company's fourth quarter included the latest Harry Potter film, and management also noted record subscription growth at the cable division.

Looking ahead to 2006, the market is looking for the company to earn 89 cents a share. While that represents 16% annual growth from the 77-cent-a-share 2005 estimate, Time Warner is already trading at 19 times expected full-year earnings. On that same basis, the benchmark

S&P 500

Index is valued at 16 times expected 2006 profits.

The $64,000 question, then, is what will it take to get Time Warner's stock to move higher? In one word, growth.

Now, that's easier said than done. The book publishing business is dead as a doornail, and advertising pickup in magazines has been squeezed by rising costs. While many folks thought that cable would help drive the next wave of technological advances in the home, the truth for investors is that this business is no more lucrative than the graveyard that has become the telephone services space.

And this is not to mention the AOL division, which is often said to have little value reflected in the current stock price when you apply average market multiples to Time Warner's cable, television, movie and publishing businesses. Again, that idea was flipped on its head when Google came in on Dec. 23 and bought 5% of AOL for $1 billion.

Outside of a resurgence in the AOL brand, that leaves businesses like


and Warner's movie divisions as the only real hope for future growth. Of these two areas, only the pure subscription model of Time Warner's pay cable units offer investors any real visibility.

So yes, Time Warner does hold value, and yes, Carl Icahn can help the company unlock some of it. That said, I don't believe there's much either the current management or the activist shareholder can do in 2006 to free the stock from its recent trading range.

I realize this is a controversial stock -- investors of all shapes and sizes have billions of dollars riding on the outcome of this battle. Please feel free to


me with your feedback.

David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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