The sell-side analysts following AOL Time Warner (AOL) aren't buying the company's growth projections.

The beleaguered multimedia conglomerate is projecting double-digit growth in 2004 for earnings before interest, taxes, depreciation and amortization -- a common bottom-line performance yardstick for media and entertainment companies.

But analysts following AOL Time Warner aren't so optimistic. A clear majority of analysts with published estimates for 2004 are expecting single-digit growth, according to

TheStreet.com's

survey, with the mean forecast coming in below 8%.

That gap between company promises and analysts' projections -- reflecting Wall Street's skepticism about AOL Time Warner's forecasting ability -- raises significant questions for investors. As time passes, who will turn out to be right? And how much will the stock rise or fall in response?

One buy-sider votes for the analysts. "My bias is, in a case where the Street is below management's forecast, that tells me there's a management credibility gap -- I don't like the stock," says the buy-sider, speaking on condition of anonymity. That analyst is considering short-selling AOL Time Warner's stock, but hasn't yet.

On Monday, AOL Time Warner's shares fell 13 cents to close at $11.27. Shares in the company have traded between $27.44 at the high end and $8.70 at the low over the past 52 weeks.

It's King

At issue is AOL Time Warner's future cash-generating ability. While the conglomerate and other media companies often suggest that a more appropriate measure is free cash flow (EBITDA after capital expenditures and interest expense have been subtracted), analysts are still using EBITDA as a key yardstick, and AOL Time Warner's forecasts acknowledge that.

Referring to 2003 as a "reset year," AOL Time Warner Chief Executive Dick Parsons said on a conference call in January that the company would deliver "double-digit" EBITDA growth beginning in 2004, a forecast reiterated on the call by CFO Wayne Pace.

Trouble is, sell-side analysts don't agree. Out of 14 brokerages for which

TheStreet.com

has found a published 2004 EBITDA estimate for AOL Time Warner, only four analysts are projecting double-digit growth over 2003. And one of those four counts only if you round his forecast up from 9.7%. The mean growth rate amounts to 7.8%, and the median is 7.1%.

Mean Street
Analysts all over the map on AOL EBITDA forecasts

Source: Brokerage research reports

And it's not as if these analysts simply disagree on the timing of a turnaround. Of the analysts

TSC

could find who had published multiyear models, a majority -- including 2004 double-digit believer J.P. Morgan -- forecast single-digit compound annual growth rate for EBITDA.

What has made AOL Time Warner analysts skeptical about the future is the company's past performance.

"There's a credibility issue here," says John Tinker of Blaylock & Partners who, with his forecast of EBITDA growing 11.7% in 2004 to $10.2 billion is one of AOL Time Warner's most optimistic followers on the sell side. "They've lowered numbers the last two times they've spoken with the Street," says Tinker, who has a buy rating on the stock and a price target of $23. His firm hasn't done banking for AOL Time Warner.

Wowing 'Em

Indeed, when the America Online unit made a major presentation to analysts in early December, the company announced a 2003 forecast for the unit that was

far below prior expectations. And when AOL Time Warner released results for 2002's fourth quarter in January, it surprised analysts with a forecast of 2003 companywide EBITDA

essentially flat compared with 2002.

While AOL Time Warner lowered Wall Street's expections several times starting in September 2001, the anonymous sell-sider says the December revision was particularly significant because it affected estimates formulated on Parsons' watch, not those inherited from the prior administration at AOL Time Warner. "Those were the first time they brought down the Parsons numbers," says the analyst. "Now people don't believe his guidance."

David Joyce, cable and media analyst at Guzman & Co., says analysts' single-digit forecasts reflect in part a wait-and-see attitude toward AOL Time Warner specifically. Joyce, who has a "perform in line" rating on AOL Time Warner and a $17 price target, estimates 2004 EBITDA growth that rounds off to 10%. His firm has done recent underwriting for AOL Time Warner.

More generally, says Joyce, the situation reflects a fearful investment climate, one in which analysts have to contend with a 3-year-old recession, the ongoing war on terrorism and other geopolitical issues. That translates, he says, into a general sell-side research stance that is "extra conservative" compared with previous calculations of estimates. If analysts are more fearful than company management, investors are more fearful than analysts.

As to how the discrepancy plays out between AOL Time Warner and its analysts, the anonymous buy-sider acknowledges that the company's relative optimism may turn out to be justified, but he suspects not. If certain aspects of AOL Time Warner's story go well -- such as asset sales and online ad revenues -- the stock won't take a big hit, he says. If, however, the planned IPO of the company's cable TV operations doesn't go well and there's other bad news from the company, bringing down guidance as well will mean "a lot of strikes" for Parsons.

Tinker, in contrast, points to several factors bolstering his optimism that the company will meet its 2004 target. With the third

Lord of the Rings

movie arriving late this year and the next

Harry Potter

installment due in 2004, he says, the company's movie division has a good lineup for the next two years -- above-average visibility for the movie business. The cable operation, despite its recent disappointment, is still doing "a reasonable job," he says.

The music business will stabilize, adds Tinker. But he says he suspects that the biggest difference between his outlook for the company and that of other analysts is that he's expecting the online unit to report EBITDA growth in 2004 -- an 11% rise, to be precise, following a 20% decline in 2003. "AOL is the wild card. There's been no evidence of any great change there yet," he says.

Concludes Tinker, "This is far and away the least expensive media stock around of the major companies."