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New Line-Up For Time Warner?


The folks at Time Warner have been nothing but dazed and confused since Richard Parsons took over as Chairman of the Board and Chief Executive Officer in May 2003.

"Every day I work so hard, bringin' home my hard-earned pay
Try to love you baby, but you push me away
Don't know where you're goin' only know just where you've been
Sweet little baby, I want you again."
Dazed and Confused (Jimmy Page)

Dazed and Confused is off of Led Zeppelin's debut album, released on January 12, 1969. If there is such a thing as a perfect album, Zep's first is about as close as one can get. Good Times, Bad Times, Babe I'm Gonna Leave You and Your Time is Gonna Come, among others! This was an album you could listen to over and over again from front to back without ever having to skip a song.

I guess in today's world this would be the "anti-iPod" LP. Dazed and Confused featured Jimmy Page playing guitar with a cello bow, and they call Steve Jobs a visionary.

Well, it can be argued that the folks at Time Warner (TWX) have been nothing but dazed and confused since Richard Parsons took over as Chairman of the Board and Chief Executive Officer in May 2003. The stock price has participated in that confusion as well, and but for a brief run to $23.15 earlier this year has been floundering around $18.25. The "Street" has put the lion's share of the blame solely at the feet of Richard Parsons. And although he is complicit for some of the woes of TWX he is not without accomplices.

Sometimes, though, things are as simple as they appear. On October 26, The London Times reported that CEO Richard Parsons was "poised to hand over the job to Jeff Bewkes". Among the many knocks on Richard Parsons has been his "sentimentality" regarding Time Warner, as currently constituted. The prevailing theory is once Richard Parsons is gone, Jeff Bewkes will take the necessary steps to shake up the existing corporate structure to unlock "hidden value" for shareholders. Time will tell if Mr. Bewkes will be able to succeed with that strategy or whether or not he will get the opportunity in the first place. But in regards to The London Times article, "where there is smoke, there is fire," and if Mr. Parsons does in fact step down, the knee-jerk reaction in the price of TWX should be a move up to at least $22.00, and that is before any successor even changes the nameplate on the office door.

It is hard to compare Time Warner on a valuation basis to its peers as there is no one company that is a true comparison. But take this into consideration: At 11.50 times trailing and 16 times forward earnings, TWX is cheaper than just about any other company in comparable businesses on most any metric you can find. Time Warner is due to report 3Q earnings before the open on November 7. The "Street" is looking for $0.24 EPS on $11.34 bln in revenues.

I don't think this is an earnings story, but, that being said, I think there is a very good chance for an upside surprise. The real story here (as in every trade) is understanding your downside. At current valuations and with the growth rate TWX is seeing I am hard pressed to believe we will see the stock trade below or even close to $17.00 The upside with a shake up in the executive office should be as much as $22.00. Not a bad risk reward in my book.

And just think about the symmetry of a Parson's resignation coupled with Zep's first album. Good Times, Bad Times, Babe I'm Gonna Leave You, Communication Breakdown, I Can't Quit You Baby, How Many More Times - it is almost as if Robert and Jimmy looked into their crystal ball 29 years or so into the future when they put it all on vinyl!
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No positions in stocks mentioned.

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