According to Dimitra Defotis, Barron’s analyst/reporter, Time Warner seems under priced today:

a. The company has spinoff its 84% stake in Time Warner Cable in a deal that will net Time Warner more than $9.25 billion in a cash dividend. Yet, shareholders have dumped the stock, hand over fist, leaving Time Warner (ticker: TWX) at 14.69, down about 12% this year.

b. Today there is a cheap valuation, the promising outlook for the company’s remaining media and entertainment units, and the opportune ways Time Warner can use its cash.

c. Strip out the value of the cable-transmission business — about $5 per share — and Time Warner trades closer to $10, or for a mere 10 times estimated 2008 earnings of 99 cents a share.

c. Time Warner is left with four business units: filmed entertainment, cable-television networks, publishing and AOL. Together these operations could generate more than $31 billion in revenue this year, and $7.5 billion in Ebitda.

d. Time Warner’s most immediate opportunity to enhance shareholder value could come later this year, if they can separate, spin off or sell the subscription arm of AOL.  The business lost two-thirds of its subscribers from 2002 to just 8.7 million at the end of the first quarter.

e. Excising the subscription business also would expose the profitability of AOL’s digital advertising platform, which Time Warner has been bulking up through acquisitions. With the recent $850 million purchase of Bebo, a social-networking site operating in the U.K. and Australia, the company hopes to develop new ways to connect and advertise to its AOL customers.

f.  Even with its problems, AOL enjoys 35% profit margins, about three times those of the filmed-entertainment business. The film division may prove the biggest challenge;  the unit produced revenue of $11.7 billion last year, and $845 million of operating profits. It will account for the biggest chunk of total revenue — 37% — after cable departs, but remains the least profitable part of the company, with operating margins of just 10.4%, reflecting the high cost of making movies. The company is exploring opportunities in Eastern Europe, Russia, Latin America and India . About 40% of Warner Brothers’ revenue is derived outside the U.S.

g. Sex and the City’s Carrie, Charlotte and other television endeavors, from properties such as Turner Broadcasting System’s TNT, CNN and a joint venture with CBS, helped network profits jump 11% last year to $3 billion, even though revenue expanded by just 2%.

h. Advertising (20+%), which is a declining industry in traditional media, is far less than that of media companies such as CBS (CBS), which depends on advertising for 60% of revenue, and Viacom (VIA), which depends on ads for 40% of sales.

i .The impact of a softer advertising environment has been most pronounced in Time Warner’s publishing business, where total revenue was flat at $5 billion last year. Even so, the unit generated $907 million in operating profits, testament to its healthy operating margins.

j. Investors are happy about the separation of cable, allowing Time Warner to focus on its core businesses;  It could even buy back a third of its stock (The company has repurchased $22.5 billion of stock, or roughly a quarter of its outstanding float, in the past few years).

k. The CEO has stated that the company needs to invest in our businesses…to generate attractive free cash flow; second is acquisitions; third, the company could boost its dividend or buy back stock.

CONCLUSION:

Excluding cable, Time Warner’s stock, now at 14.69, would trade closer to 10. But the company’s prospects and its other assets’ value suggest the shares are worth more than 20.

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