AOL Stands Above Tech Carnage

An upgrade lifts the beleaguered media conglomerate as Wall Street rallies to a forgotten cause.
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After a long chill, Wall Street's warming up again to AOL Time Warner (AOL) .

Almost alone among big-cap tech names, AOL stock held its ground Thursday, riding the Street's renewed enthusiasm for its prospects as outlined in a Merrill Lynch upgrade. That note, from analyst Jessica Reif Cohen, boosted the firm's rating to buy from neutral, citing cost-cutting at the America Online unit and debt reduction.

So while a string of tech earnings disappointments led to a 2% selloff in the tech-heavy

Nasdaq Composite

index, and shares in big tech favorites like


(NOK) - Get Report



(IBM) - Get Report

waded in a sea of red ink, AOL rose 27 cents to $16.63. That's nearly double the stock's 52-week low of $8.70, reached last summer. AOL Time Warner's stock has risen steadily since dipping below $10 less than five months ago.


Cohen's report -- in which she put a price target of $24 on the stock -- is only the latest sign that

the sell-side brokerage community is warming up to the multimedia conglomerate again following the serial disappointments of the 2001 merger of AOL with Time Warner.

With AOL Time Warner's second-quarter results due out next Wednesday, Cohen's report again raises Wall Street's once-burned expectations for the company. Cohen boosted her 2003 and 2004 estimates for the company's earnings before interest, taxes, depreciation and amortization -- a common media-industry yardstick -- to $9.3 billion and $10.3 billion, respectively. That 2003 number implies EBITDA growth of 6%, slightly higher than the company's guidance of "low-mid-single digit" growth.

Cohen's new estimate of a 1% EBITDA decline for the AOL unit in 2003 puts her at the top end of EBITDA guidance ranging from flat to down 10%.


noted last month,

some investors are hoping that AOL Time Warner will raise its full-year guidance when it reports financials next week.

New Balance

Thanks to deals such as the

$750 million payment from


(MSFT) - Get Report

to settle antitrust litigation, AOL Time Warner has strengthened its balance sheet, writes Cohen, and is less likely to face a forced IPO of its cable TV assets to raise money. (Merrill has done recent investment banking for the conglomerate.)

AOL Time Warner will likely meet its debt-reduction targets for year-end 2003 and 2004 without further asset sales, Cohen adds.

Meanwhile, though difficulties at AOL Time Warner's online unit are far from over, Cohen says the AOL segment will perform more consistently under the supervision of media and communications group chairman Don Logan. There's little evidence of forthcoming revenue-driven profitability growth, says Cohen, but she's confident the company will get a payoff from "aggressive cost management."

Over the next five years, says Cohen, AOL's full-priced narrowband service will shed 2 million subscribers annually, dropping to 14.7 million subscribers by 2007. Over the same five years, she says, AOL will have to cut a half-billion dollars in total costs to maintain current levels of subscriber operating cash flow.