Time Warner rates 'buy' from analysts

The Baltimore Sun

I'm not quite sure what to make of all that has been happening at Time Warner Inc. How does the future look?

- K.V., via the Internet

Here's one blessing: Millions of trial discs for its AOL service are no longer found in magazines and mailboxes everywhere.

The world's largest media company has shifted strategy and made most of the AOL online services free to anyone with a broadband connection. It claims this advertising-based revenue model is already attracting many new users. Google, which has a 5 percent interest in AOL, now has its search feature on the AOL site as well.

With a long-term goal of becoming a full-service entertainment destination, AOL also has significantly expanded its subscription online music service and is selling movies and television shows through a new video portal.

Time Warner (TWX) shares are up 9 percent this year after last year's 10 percent decline; shares were up 8 percent in 2004 and nearly 12 percent in 2003. The company plans to buy back $20 billion of its stock through 2007.

It intends to reduce its global online work force by 5,000 and is selling off non-core assets. Its German Internet access business is being sold for $870 million to an Italian telecommunications firm and its French online business for $365 million to a French telecom.

Similarly, it plans to sell 18 of its magazines, including Popular Mechanics, Parenting and Field & Stream. Many of these came from its acquisition of Times Mirror Magazines in 2000. It wants to focus on its larger titles such as Time, Sports Illustrated and People. It currently has about 150 magazines.

The consensus recommendation on shares of Time Warner among Wall Street analysts is a "buy," according to Thomson Financial, consisting of eight "strong buys," eight "buys," 10 "holds" and one "under perform."

Time Warner derives solid revenue from an impressive subscription base, has upgraded its cable assets, grinds out hit programs on HBO and owns a large film library. Nonetheless, its operating units haven't fit together well and it has encountered other problems.

For instance, it must restate financial results for transactions in 2000 and 2001 that primarily involved online advertising. This follows settlements made with the Securities and Exchange Commission and in federal court.

It has also been sued by AOL subscribers for a July data breach in which personal search histories were released and made available for download.

Time Warner earnings are expected to rise 9 percent this year compared with 17 percent expected for the diversified entertainment industry.

Next year's projected 17 percent increase compares with 25 percent forecast industrywide. The company's five-year annualized return is expected to be 14 percent.

Is the Heartland Value Fund a good bet? It was suggested to me.

- C.R., via the Internet

The past year has been a solid one for this fund, which employs a clear strategy to invest in micro- and small-cap stocks.

It has, however, been volatile over the long haul and its $1.8 billion asset size is enormous for a fund that must move nimbly among small equities.

The Heartland Value Fund (HRTVX) has a one-year return of 23 percent to rank in the top 30 percent of small value funds. Its three-year annualized return of 13 percent places it in the lowest 15 percent of its peers.

Its management team consists of the experienced William Nasgovitz, on board since 1984; Bradford Evans, since 2004; and Hugh Denison, since May. They seek financially sound companies with low prices relative to their history and potential, paying special attention to top management.

"I don't recommend the Heartland Value Fund, even though its strategy is consistently applied and it has been effective, because there have been serious regulatory issues with this fund company," said Marta Norton, analyst with Morningstar Inc. in Chicago.

"While it is encouraging that insider-trading charges against it were dropped, there are still outstanding fraud charges."

In late 2003, the SEC brought a civil fraud action against Heartland Funds President Nasgovitz and client Ray Krueger related to the collapse of two of the firm's municipal bond funds in 2000, Norton noted. Insider-trading claims were dismissed Aug. 31, and the firm is disputing the remaining SEC charges.

The fund company's board has since been overhauled, but Morningstar recommends that investors consider selling their stakes in Heartland Funds until all charges are resolved.

One-fourth of Heartland Value Fund's portfolio was recently in business services, with industrial materials, financial services and technology hardware other significant concentrations.

Top holdings were InterDigital Communications Corp., Sirna Therapeutics Inc., Alaska Air Group Inc., Input/Output Inc., Newpark Resources Inc., Presidential Life Corp. and Sterling Financial Corp.

This "no-load" (no sales charge) fund requires a $5,000 minimum initial purchase and has an annual expense ratio of 1.17 percent.

I'm new to bond investing and would like to know what the term "coupon" refers to.

- T.L., via the Internet

Bonds used to be issued as large sheets of paper with coupons attached at the bottom. Investors would clip off coupons every six months and mail them in to receive their money.

Today, the term "clipping coupons" is still used, even though electronic bookkeeping means actual clipping has gone by the wayside. The coupon simply represents the amount, generally paid out semiannually, that the issuer is committed to paying the bondholder until the bond reaches maturity.

Interest-rate risk plays an important role in bond investing. When current rates are higher than your bond's coupon rate, your bond will sell for less than its face value. Conversely, when current rates go down, your bond becomes more valuable.


Andrew Leckey writes for Tribune Media Services.

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