Markets & Finance

JP Morgan Pans Time Warner


JP Morgan downgraded its opinion on Time Warner Inc. (TWX) on Sept. 28 to neutral from overweight, explaining that the New York media giant's movie revenue growth will slow, its stock is overvalued, and its Internet unit AOL faces long-term challenges.

AOL said on Aug. 2 that it would make its services, which include instant messaging, parental control, anti-spyware and other features -- for free to anyone with a broadband connection.

In spite of such efforts, AOL will continue to lose search market share, JP Morgan analyst Imran Khan said in a research note Sept. 28. AOL's domestic search market already declined to 6.3% from 12.9% during the past two years. It has branded its search as "enhanced by Google," and is likely to lose share as Internet users navigate directly to Google or other search engines, Khan says.

Meanwhile Khan sees limited growth in CPM (cost per thousand impressions), or the practice of charging advertisers for the number of times consumers click on an ad regardless of what happens afterward. Advertisers might find AOL's audience demographic "relatively less attractive," Khan said. Social networking sites like MySpace and Facebook attract a younger audience, Khan added.

AOL isn't Time Warner's only weak point. JPMorgan forecasts that the company's filmed entertainment revenue growth will slow to 3.8% between fiscal year 2005 and fiscal year 2010, compared to 8.9% between fiscal year 1995 through fiscal year 2005. The previous decade had included the emergence of the DVD and movie hits such as Harry Potter and The Lord of the Rings - tough growth rates to sustain in the next.

The stock was down nearly 2% to $18.22 per share on the New York Stock Exchange on Sept. 28. This is at the high end of its 52-week range between $18.89 and $15.70 per share.

Khan is assuming coverage of Time Warner from the company's former analyst John Blackledge. JPMorgan has received compensation from Time Warner for investment banking services during the past twelve months, among other things.


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