This business of figuring out what AOL Time Warner ( AOL) stock is really worth gets harder by the day.

If the yearlong retreat of media-business spending and turmoil at the top of the New York media conglomerate weren't enough, over the past few weeks the company's shares have marched to the drumbeat of mounting government investigations. The latest cloud to blot out investors' view of the sun appeared Wednesday, when AOL Time Warner confirmed that the Justice Department had joined the Securities and Exchange Commission in an investigation into accounting practices at America Online.

The news sent AOL Time Warner's shares back toward historic lows, though how historic is a matter of interpretation. Wednesday the shares dropped 90 cents to $11.50 -- putting them within $3 of the 52-week low set last Thursday in the wake of the SEC inquiry's disclosure, and down 76% from AOL Time Warner's 52-week high.

Given the broadening bookkeeping scandal consuming Wall Street and the aggressive targets AOL Time Warner itself once set, analysts have taken to reassessing the company's numbers to find a reasonable comparison for the flagging stock. But what may surprise investors is to find just how far back they must go.

Growth Concerns

On Tuesday, Sanford Bernstein analyst Tom Wolzien pointed to growth concerns as the biggest drag on AOL's stock. Through the decades, Bernstein says, AOL Time Warner predecessor Time, Inc. had made a habit of buying growth through purchases of media properties including television stations, cable TV systems, Ted Turner's cable programming empire and, most recently, America Online. "What's happening now is the growth they thought they bought isn't there," says Wolzien.

The question Wolzien says he's struggling with, relative to AOL Time Warner and other media companies, is how to value them now that the market looks at them as "real stocks, rather than something special," in his words. "Now that they can be looked at on a a P/E basis, the question is where they belong on a P/E basis."

Wolzien downgraded his rating on AOL Time Warner last week from outperform to market perform, writing, "We do not think it appropriate to recommend the stock of a company under SEC investigation." Bernstein hasn't done recent investment banking for AOL Time Warner.

Chew on This

Not that the fall of AOL Time Warner's stock hasn't already caused enough pain for employees and other stockholders, but the historical performance of the stock may be worse than is commonly represented in the media.

Taking the Long Way Home
Time Warner's stock last hit $17 in 1996

At their current price, AOL Time Warner's shares are back where America Online's shares were in October 1998, on a split-adjusted basis. Because the merger that created AOL Time Warner was structured as AOL's acquisition of Time Warner, the old AOL shares have served as the benchmark for the stock's historical performance.

But for several reasons, perhaps Time Warner is the more appropriate stock-chart predecessor to AOL Time Warner's shares. Not only does the former Time Warner account for a majority of the conglomerate's revenue and operating income, but also veteran executives from Time Warner are firmly in control of the company's operations and philosophy.

In that case, the logical historical comparison to make is that between 1.5 shares of AOL Time Warner and a single share of old Time Warner stock, since Time Warner stockholders received 1.5 shares of AOL Time Warner for each of their shares at the time of the merger. At Wednesday's lows, that translated into a Time Warner share price under $17 -- a level to which Time Warner fell briefly in 1996, and at which it last traded consistently in 1993.

Clearly very few observers thought it would come to this for AOL Time Warner, which only a year ago was still one of the tech market's favorites. But the lesson that past is prologue can't have been lost on investors by now.

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