iBooyah.com: Time Warner (TWX) – AOL, The step child no more?
To provide some background to those who are not familiar, AOL and Time Warner decided to merge in 2000. As most of you recall, this was during the peak of the internet bubble. It was originally hailed by Wall Street as the merger was seen a marriage between “new economy” and “old economy” companies. This was indeed a bold move with tremendous potentials. The idea sounded great in theory.
Unfortunately, the combined companies were unable to execute due to differences in culture so the right strategy was never formed. Moreover, macroeconomic factors played a role. Soon after the merger, the economy went into a recession and most of AOL’s customers were going bankrupt left and right. All of the sudden, the combined company lost their focus and started to slide into what appears to be chaos. Thousands of employees were laid off as a result.
Time Warner (TWX) the company and its stocks has seen better days. Although TWX comprise of many other businesses including cable, magazines and networks, we shall focus on AOL given this unit is going through a change in strategy. Last quarter (Q2 of 2006), TWX reported $1 billion in profit and announced a new strategy for their AOL unit. The plan calls for making AOL a free portal much like MSN (MSFT) and Yahoo! (YHOO). As part of this move, 5,000 positions are to be eliminated by the end of this year. This is expected to save the company about a billion in 2007.
Is TWX too late to the free portal strategy, a market that is dominated by GOOG, MSFT and YHOO? Can they comeback way from behind and make a differences?
In my view, the fact TWX has finally acknowledged their failed strategy is a positive step in the right direction. Management should have crafted this strategy three years ago. Three years ago, it was blatantly obvious that AOL was in trouble as millions of customers were canceling their service for DSL and less expensive ISP. At any rate, that’s in the past. What is important when it comes to investing is the future.
In my view, the future of TWX appears to be bright. Taking bold steps to fix the “AOL situation” is the right decision for the long term. Ad revenue from AOL.com jumped 40% last quarter is further evidence to suggest this is the right strategy, whereas the dial up business lost over 3 million subscribers.
In evaluating the company’s stock, there are some upside potentials. Today, the stock closed at $16.05 and is trading at Price to Earning ratio (PE) of 15. Interestingly, when the company was losing money the same time last year, it was trading around $18 per share. In comparing TWX to its main competitors, the stock is relatively inexpensive. Disney (DIS) PE is 20 and Yahoo (YHOO) is 31.
My opinion is TWX at the current level represents a buying opportunity as the upside potential outweighs the downside. This stock could be in the $20 range within the next 6 months if management can execute on the AOL portal strategy and keep cost under control.
References:
http://news.bbc.co.uk/2/hi/business/597169.stm
http://yahoo.businessweek.com/investor/content/aug2006/pi20060802_422057.htm
http://biz.yahoo.com/ap/060802/earns_time_warner.html?.v=18
http://finance.yahoo.com/q/co?s=TWX
