Bounce Time for Time Warner?

Investors continue to be frustrated with Time Warner. Before Carl Icahn's attempted raid on the media giant a few months ago, the stock was around $17-$18. Now, it's trading below $17 -- more or less where it has been for nearly three years. If Icahn's threats of proxy fights and Time Warner (TWX) Chairman and CEO Richard Parsons' promises of up to $20 billion in stock buybacks and $500 million in cost-cutting this year and next weren't able to nudge up the stock, what could?

So what happens now? Plenty.

The smart thing to do now is to buy the languishing stock before the big investors catch on that some significant moves are about to take place, with major deals as soon as the third quarter. Parsons will have to make some significant moves soon to shake off Icahn's rant that the company is saddled with a "do-nothing management."

Any positive news on Time Warner could go a long way in propelling the share price. That's because Wall Street analysts are down on the stock. Many are still smarting about the overhyped and overpriced merger with AOL. Nearly all have neutral or hold recommendations, as good as a sell to the pros.


  Among the few bulls is Tuna Amobi, media analyst for Standard & Poor's, who gives the stock four STARS (out of five) and has a $22-a-share 12-month price target. Lawrence Harris of Oppenheimer, also bullish on Time Warner, has a price target of $24.75, based on his analysis of cash flows generated by the different parts of the business.

Here are some of the things that could happen to boost the stock price:

Cable IPO

Plans are already afoot to take Time Warner's cable operations public. The outfit has 11 million cable subscribers, and it stands to gain a few million more since agreeing to acquire Adelphia Communications in partnership with Comcast (CMCSA) for $17.6 billion in cash and stock. Adelphia has 3.5 million customers.

The timing of the cable IPO could be accelerated, given the continued pressure on Parsons because of his rapprochement with Icahn. Selling 20% of the cable unit to the public could fetch $10 billion or $11 billion, depending on the multiple used.

A dramatic move with AOL.

Google (GOOG) paid $1 billion for a 5% stake in AOL last year, which sets a valuation of at least $20 billion for the unit. Either Google will raise its stake in AOL, say some investors, or it will convince Parsons and the board to take the online unit public. Selling 20% of AOL could fetch at least $4 billion.

Share buybacks are powerful

Parsons promised Icahn he would raise share buybacks from $12 billion to $20 billion by the end of 2007, but that pledge hasn't lifted investors' spirits. But buybacks are already having an impact on earnings per share. Merrill Lynch's (MER) Jessica Reif Cohen, figures buybacks should increase 2006 per-share earnings to 86 cents, from an earlier estimate of 85 cents, and 2007 profits should rise to $1.02, from a prior estimate of 97 cents.

Of course, that's not going to impress investors who bought the stock at $50 or more. In fact, some analysts think there is a considerable "overhang" of stock from investors anxious to cash out whenever they think they have a shot at breaking even. All they want to do is sell -- but they can't right now, without chalking up huge losses.


  When Parsons sat down recently for an interview with BusinessWeek Editor-in-Chief Stephen J. Adler, he was asked why investors are so unhappy. Parson blamed it on uncertainty in the industry, and on investor concern over the future of Old Media" in the Digital Age. According to Parsons, the investors are saying, "Right now, we don't know, so we're staying away."

Keep an eye on Time Warner. Pretty soon investors will be coming back.