Time Warner Inc posted a higher-than-expected quarterly profit on a rebound in advertising sales at its cable networks and magazines, as well as strong DVD sales of The Blind Side and Sherlock Holmes.

Shares of Time Warner fell 1 percent amid a wider market downturn. However, in a sign that the rally in media conglomerate stocks may be ending, News Corp shares dropped as much as 9 percent on Wednesday, a day after posting a strong quarter but lower-than-expected outlook.

Time Warner's share price has risen more than 12 percent since the start of the year, along with other major media stocks, as investors bet on an advertising market recovery after a severe downturn in 2009.

Media investor Larry Haverty of Gabelli & Co was cautious about any further upside for the stock, even though he called Time Warner's results terrific and said he was impressed with its high conversion of revenue to cash flow.

Six months ago I thought the stock was undervalued but none of the media companies are paragons of enormous value right now, he said.

Time Warner shares trade at around 7.9 times 2011 earnings before interest, taxes, depreciation and amortization (EBITDA) compared with Viacom which is currently at 7.7 times and News Corp at 8.6 times.

Time Warner said its first-quarter net income rose to $725 million, or 62 cents a share, from $467 million, or 39 cents a share, a year earlier. Excluding one-time items, its profit of 61 cents a share beat the average analyst forecast of 48 cents, according to Thomson Reuters I/B/E/S.

Revenue rose 5 percent to $6.3 billion, roughly in line with expectations. Advertising sales rose 9 percent at its cable networks, which were also helped by higher fees that cable operators pay to carry channels such as CNN and TNT.

The numbers were impressive. The networks are going to surprise people, said Thomas Eagan, an analyst at Collins Stewart.

The better-than-expected performance encouraged Time Warner to raise its 2010 outlook slightly. It expects full-year profit excluding items to grow by at least mid-teens percentage points. Previously, it had forecast profit to increase by around mid-teens percentage points.

CNN CHALLENGE

The future of CNN has been the subject of speculation in recent months as it has lost ground to News Corp's Fox News, the most watched news network on U.S. cable television.

This week, there have been media reports that CNN is in talks with CBS to form a news gathering partnership to help save costs. CBS Corp reports results later on Wednesday.

Time Warner Chief Executive Jeff Bewkes told analysts on a conference call it was no secret CNN has talked to other news organizations.

He said it was entirely possible CNN could reach a partnership with another news organization in the next 12 months since there were no particular obstacles to such a deal.

Time Warner is also one of the lead bidders in an ongoing auction for storied Hollywood studio MGM, which is home to movie franchises like James Bond and Pink Panther.

Bewkes said buying MGM could make sense but only at the right price. Time Warner is believed to have bid around $1.5 billion for MGM, but the studio is looking for more.

Time Warner also owns Time Inc, the largest U.S. magazine publisher, which reported a 5 percent improvement in ad sales.

Revenue increased just 2 percent at Warner Bros, the filmed entertainment unit, mainly due to DVD sales and the theatrical release of Valentine's Day.

Time Warner shares were down 42 cents at $32.25 in midday trading. The stock hit their highest level in nearly 20 months on April 30. News Corp shares were down 90 cents at $14.51 after falling to as low as $13.66 earlier on Wednesday.

(Reporting by Yinka Adegoke; Editing by Derek Caney)

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