The battering that AOL Time Warner's (AOL) shares have taken in the market won't be easily repaired.
Buy-siders say that a turnaround in AOL's shares, which have plummeted 74% from their 52-week high, seems inevitable. But they say such a reversal will likely be not only slow but also reliant on forces well out of the company's control.
That means that though an investment in AOL Time Warner might feel safe for some investors, it won't pay off anytime in the near future, no matter how loudly the stock screams "buy."
"I don't know if anything the company can say in this type of market can stimulate the stock that much," says Paul Anthony, an investment analyst at money management firm Sheets Smith & Associates, a holder of AOL Time Warner stock. "This thing needs multiple factors to get it going again."
AOL's shares, which ended 2001 at $32.10 and earlier this month hit a 52-week low of $12.04, fell 7 cents Monday to close at $13.07.
One of those factors, says Anthony, is a turnaround in the economy. Though a rising tide may lift all boats, the falling economy has sunk AOL Time Warner's more than most; J.P. Morgan analyst Spencer Wang, for example, issued a report last week calculating that AOL Time Warner was trading at a 27% discount to peers
Yet another factor, says Anthony, is "an earnest attempt" by the company to pay down some of its debt, which amounted to a net of $27.6 billion at the end of March. That strategy proved successful for
several years back, says Anthony, adding, "These days, nobody likes debt."
East by Southeast
Salvatore Muoio, a longtime media and telecommunications watcher who is principal of the SM Investors investment partnership, thinks AOL Time Warner's most promising option is to come to some resolution of its Time Warner Entertainment partnership, in which a minority stake is held by
. The partnership -- whose dissolution is high on AOL Time Warner's to-do list -- confuses the market and hangs over the company's stock, says Muoio.
A public offering of TWE, he says, would create a pure-play cable television currency, one that would trade at a better multiple than the parent company and could be used to make acquisitions, such as for New York area operator
. "If CVC came up for sale,
AOL Time Warner could do it," Muoio speculates. "Right now, I don't know."
Another buy-sider, speaking on condition of anonymity, says the company needs to show improving results at different units -- for example, in the America Online unit's advertising revenue. "The numbers have to stop going the wrong way," says the buy-sider. "It's pretty basic."
Yet another issue, says the buy-sider, who does not currently hold shares of AOL Time Warner, is the transparency of the company's financial statements. Although AOL breaks out results of its different business units -- cable systems, networks, filmed entertainment, publishing and online -- investors want more information, such as reassuring details about capital expenditures, in the wake of alarming disclosures from cable operator
Investors are also curious to know what exactly will become of Chief Operating Officer Bob Pittman, the executive who pounded the table on the company's unsuccessful attempt to meet its avowed 2001 financial goals, but whose future at AOL Time Warner and America Online seems suddenly vague.
The market's general thirst for specific detail may run counter to the tastes of AOL Time Warner CEO Dick Parsons, at least as far as financial forecasts are concerned. In January he made it clear to analysts that he wasn't interested in
providing detailed targets for specific units.
About the only guidance AOL Time Warner has given analysts in recent months is to nudge various estimates downward, such as
lowering the company's 2002 forecast for earnings before interest, taxes, depreciation and amortization. The company is due to report its latest round of quarterly results next week.
Meanwhile, suggests another buy-sider, the selling that's depressing AOL Time Warner stock stems from another phenomenon that, like the economy in general, is well beyond the company's control. That impetus, says the buy-sider -- not a holder of AOL shares -- is the pressure on mutual fund managers to come up with cash to meet redemptions.
"I think as long as there are redemptions from mutual funds and AOL trades 25 million shares a day, it will be a source of liquidity regardless of valuation," says the buy-sider, responding to an email on condition of anonymity.