Time Warner Feels Pain From AOL, Focuses on Content

Andrew Leckey
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Posted: Oct 03, 2008 12:01 AM
Time Warner Feels Pain From AOL, Focuses on Content

Q. My Time Warner Inc. shares haven't fared well. Are things getting even worse? -- R.D., via the Internet

A. The bright side is that about three-fourths of the international media and entertainment conglomerate's revenue is derived from content sales and subscriptions.

Over the decades, economic trauma has had little effect on those areas.

The dark side, however, is that the remaining one-fourth of revenue comes from advertising, which has definitely been hurt by the economy.

Still struggling because of its merger with AOL and the inability of its various divisions to collaborate effectively, Time Warner is increasingly focusing on content such as films and magazines, rather than on delivery.

By year-end it intends to spin off Time Warner Cable, the nation's No. 2 cable company, from which it will receive a $9.25 billion dividend payment.

It plans to split AOL's dial-up Internet and advertising businesses into separate divisions by early next year, enabling the sale or merger of either business. There reportedly have been talks to combine the AOL advertising business with either Yahoo Inc. or Microsoft Corp., while EarthLink Inc. and Liberty Media Corp. have expressed interest in the dial-up business.

Shares of Time Warner (TWX) are down 18 percent this year following last year's 24 percent decline. Second-quarter net income fell 26 percent on declining AOL subscriber fees and lower Time publishing advertising revenues.

Google Inc. recently said its 5 percent stake in AOL, purchased in 2005 for $1 billion, "may be impaired," meaning its value is reduced.

Consensus rating on Time Warner stock is "buy," according to Thomson Financial, consisting of six "strong buys," 10 "buys" and six "holds."

This company, responsible for the successful "The Dark Knight" film, now wants its movie studio to release as many as eight such big-budget movies a year by 2011, with superheroes a high priority.

But some of its other recent films, such as "Speed Racer" and "Get Smart," did not meet expectations. It closed its Picturehouse and Warner Independent Pictures art-house labels and intends to reduce its overall releases to about 20 a year from the current 26.

Earnings are expected to rise 13 percent this year and 8 percent next year. The five-year annualized earnings projection of 13 percent is in line with the expectation for the diversified entertainment industry.

Q. Is Janus Orion Fund worth investing in? -- V.M., via the Internet

A. Orion has potential. It hunts not only for traditional growth firms but also promising companies that have stumbled.

The $5 billion Janus Orion Fund (JORNX) is down 29 percent over the past 12 months, ranking it in the bottom half of mid-cap growth funds. Its three-year annualized return of 4 percent places it in the top 3 percent of its category.

"While John Eisinger has only been lead manager since the beginning of this year, he's made some good calls on the buying and selling sides," said Michael Herbst, analyst with Morningstar Inc. in Chicago. "It is early to say, but we're optimistic about his prospects because he has avoided big potholes, and we recommend the fund."

Eisinger, who previously was an analyst at Janus and at Fidelity, reduced his position in Bavarian Motor Works AG because of concern about its leasing operation, and he unloaded the troubled investment bank UBS. He prefers underearning firms with potential, such as CapitalSource Inc. and Cypress Semiconductor Corp., and invests in all market capitalizations.

The compact portfolio holds only a few dozen stock names, which means the performance of a few holdings can have a dramatic effect on results. It includes a number of foreign stocks.

Ron Sachs, who managed this fund since its 2000 inception, left to take over Janus Twenty Fund in January. The Janus fund family had its problems in the technology bubble and market-timing scandal but has beefed up its stock-research staff and made compensation of its managers more directly correlated to fund performance than was the case in past years.

Industrial materials and technology hardware each represent about 20 percent of the Janus Orion portfolio, with other concentrations in financial services and consumer services. Top stock holdings were recently Siemens AG, Celgene Corp., CVS Caremark Corp., Crown Castle International Corp., Cypress Semiconductor, CapitalSource, America Movil, Research in Motion Ltd., CapitaLand Ltd. and Companhia Vale do Rio Doce.

This "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 0.92 percent.

Q. I took a buyout and am now working out of my home. What can I deduct from my taxes for my home office? -- K.D., via the Internet

A. Working from home is on the rise these days, but you must determine if you actually quality for the home-office deduction.

"It can't be a playroom for your kids during the day and your home office at night," said Lyle Benson, certified public accountant and president of L.K. Benson & Co. in Baltimore.

You can claim the deduction only if you use that portion of your home regularly and exclusively as your principal place of business. It must be a place to meet or deal with your clients, customers or patients in the normal course of business.

"Once you qualify, you can deduct direct and indirect expenses," Benson said. "Direct expenses apply solely to the home office, such as computer equipment and a dedicated phone line, while indirect expenses involve expenses of your total home, such as rent, real estate taxes and utilities."

The deduction, available to both renters and homeowners, has no square-footage requirement. But the amount you can deduct depends on the percentage of your home that you use for business.

(Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, 555 N. Central Ave., Suite 302, Phoenix, AZ 85004-1248, or by e-mail at andrewinv@aol.com.) (C) 2008 TRIBUNE MEDIA SERVICES, INC.