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AOL TW gets key downgrade by analyst

Feb 26, 2001  •  Post A Comment

AOL Time Warner suffered its first analyst downgrade from a Wall Street media veteran who insists that an AOL Internet Service price increase is the only way the newly merged company can attain its forecasted $11 billion in earnings this year.
David Londoner, analyst at ABN-AMRO, said AOL Time Warner management has placed too much emphasis on acceleration of the overall economy and of the company’s specific businesses the second half of 2001. There is no guarantee such acceleration will occur.
“We’re becoming skeptical that AOL Time Warner can reach its goal of $11 billion in EBITDA [earnings before interest, taxes, depreciation and amortization] this year without a price increase at the AOL Internet service of at least $2 per subscriber,” Mr. Londoner said. “We see the year overly back-ended and, with a still slowing economy, somewhat uncertain.”
He downgraded AOL Time Warner stock from a “buy” to an “add,” and lowered his 2001 earnings estimate to $10.7 billion. He has set $60 a share as a 12-month target on the stock, which traded up slightly last week on the news at about $46 a share.
Of the 21 investment banks that track AOL Time Warner, all but two have a “buy,” “strong buy” or “top pick” recommendation on the stock as guidance for investors.
AOL Time Warner declined comment on the downgrade. However, sources close to the company said it was not justified, given that Mr. Londoner’s EBITDA estimate for the company is only a fraction off the company’s target.
AOL Time Warner officials have argued that they have far less dependence on advertising revenues (which make up 24 percent of its total revenue mix) than other media companies such as Viacom or The Walt Disney Co. Mr. Londoner has not downgraded the entire media and entertainment sector of companies he follows because of persistent economic and advertising weakness.
Still, AOL Time Warner is under pressure to announce more revenue-generating synergies and lucrative multimedia pacts with major advertisers, which it had promised going into its 6-week-old merger.
Other events that would positively impact AOL Time Warner earnings and stock would be an uptick in the economy or a cash settlement in the dissolution of its Time Warner Entertainment pact with AT&T Corp., which is imminently expected.