AOL will take center-stage next week when Time Warner Inc. reports third-quarter financial results, as it aims to fend off corporate raider Carl Icahn and court suitors for its online division.
Once an anvil on Time Warner stock and responsible for wiping out more than $200 billion in shareholder value, AOL has transformed itself into the global media conglomerate's best hope for a stake in the future of media.
A decision on which suitors, led by Microsoft Corp., Google Inc., Comcast Corp. and Yahoo Inc. , will take a minority stake in the division could be weeks away, according to sources familiar with the talks.
Meanwhile, Time Warner is facing off against billionaire investor Icahn and a consortium of hedge funds, which has pushed the company to quadruple its stock buyback plan to $20 billion and completely spin off its cable division. Time Warner intends to spin off about 16 percent of the cable division after completing a deal to buy Adelphia Communications Corp next year.
Time Warner rose 1.43 percent -- a day after Time Warner's board met to discuss partnerships for AOL, although specifics could not be learned.
Regardless of which company Time Warner chooses as a partner, its stock price could break out if it chose the right combination, analysts said.
Time Warner's valuation is currently on par with that of its peers, trading at an enterprise value of eight times next year's earnings before interest, tax, depreciation and amortization basis. Enterprise value is what the market believes an ongoing company is worth, subtracting cash from its market capitalization plus debt and preferred stock.
Media conglomerate stocks have dropped between 10 percent since the beginning of this year, while the Standard & Poor's 500 index has fallen 2 percent. Time Warner's stock has dipped about 7 percent.
"We believe the company is undervalued," Jason Bazinet, an analyst at Citigroup, wrote about Time Warner's stock, echoing a sentiment heard throughout Wall Street's corridors. He initiated coverage with a "buy" rating and a $21 target price.
Oppenheimer & Co.'s Thomas Eagan, who also started coverage this week with a "buy" rating and a $24.75 target price, said getting AOL's future right could add more than $1 per share to Time Warner's stock price.
Next week, analysts will be eyeing AOL's third-quarter online advertising, which is expected to show 16 percent growth from a year earlier to $265 million, excluding the impact of the purchase of Advertising.com, Eagan said.
Some analysts are hoping for information on a bigger stock buyback commitment, although several were divided over when such an announcement might be made. The world's largest media company is expected raise its buyback from $5 billion to $10 billion or $15 billion as early as next week, some analysts said.
"One of the things they'd like to do is return more to shareholders, and ... a larger buyback makes a lot of sense at this point," Richard Greenfield, analyst at Fulcrum Global Partners, said.
"Whether you see it next week or the next couple of months, it's important that they do it," Greenfield added.
Third-quarter results, however, are expected to be lackluster, with the bulk of good news for 2005 coming on the heels of the November release of the film release of " Harry Potter and the Goblet of Fire."
Analysts expect it to match, if not do better than, the last installment at the box office. "Harry Potter and the Prisoner of Azkaban," which sold about $270 million of tickets.
Wall Street expects Time Warner to post a third-quarter profit excluding items of $828.3 million, or 18 cents, and revenue of $10.4 billion, according to Reuters Estimates.
Shares rose 25 cents to $17.73 on the New York Stock Exchange in afternoon trade.