Is AOL’s Stock Undervalued?

With shares of AOL Inc. (NYSE:AOL) trading at around $30.74, is AOL an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Despite AOL being a household name, it’s not what it used to be. Therefore, there isn’t much news to cover, and this approach will be a little different. We will get to the numbers soon, but for now, let’s look at AOL the site as opposed to AOL the business. After all, that’s where it all begins.

AOL is the 70th most visited site in the world, and the 17th most visited site in the United States. Even though the site isn’t as popular as in the past, those are still respectable numbers. On a global scale, AOL has moved up four spots over the past month, but down three spots over the past three months. Traffic is up 3.2 percent over the past three months, page views are down 0.97 percent over the past three months, the bounce rate is down 1 percent over the past three months, and time on site is up 1 percent over past three months.

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According to users, the most likeable feature on the site is strong content. This is great news considering good content should be the number one priority for any website. Coming in a close second is easy navigation – also very important. The least likeable feature is poor customer support.

AOL plans on “redesigning all content sites with responsive design.” Will that make a difference? Probably not. The real goal for AOL should be to make a big splash by offering a highly unique feature or by making an acquisition that would bring AOL back into the forefront of worthwhile news. It is possible that AOL is gun shy because of the Time Warner Cable Inc. deal (NYSE:TWC). If you’re thinking Twitter, AOL can’t afford it. You can scratch that idea.

Let’s take a look at some important numbers for AOL before forming an opinion…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for AOL is strong. The balance sheet is also healthy, which is difficult to find these days.

Debt-To-Equity

Cash

Long-Term Debt

AOL

0.03

$867.10 Million

$60.80 Million

GOOG

0.08

$48.09 Billion

$2.99 Billion

YHOO

0.00

$8.41 Billion

$127.53 Million

 

T = Technicals on the Stock Chart Still Qualify As Mixed

AOL has performed well over the past few years, but the past three months have been poor. For one-year and three-year timeframes, AOL has outperformed Google Inc. (NASDAQ:GOOG) and Yahoo! Inc. (NASDAQ:YHOO). That’s impressive.

1 Month

Year-To-Date

1 Year

3 Year

AOL

4.21%

3.58%

121.20%

48.31%

GOOG

7.73%

6.60%

30.02%

42.30%

YHOO

1.74%

-0.30%

26.05%

32.18%

 

At $30.74, AOL is currently trading below all its averages.  

50-Day SMA

31.86

100-Day SMA

33.74

200-Day SMA

31.03

 

E = Earnings Have Been Inconsistent   

Earnings have been very inconsistent on annual basis. Predicting future earnings for AOL would be like being blindfolded, spun around ten times, and then attempting to hit a bull’s-eye on a dart board from 50 feet away. As far as revenue goes, while most companies have seen increased revenue since 2009, AOL has been heading in the opposite direction. This is a bad sign.

2007

2008

2009

2010

2011

Revenue ($)in billions

5.18

4.15

3.25

2.42

2.20

Diluted EPS ($)

13.20

-14.42

2.35

-7.34

0.12

 

When we look at the last quarter on a year-over-year basis, we see equal revenue and a significant improvement in earnings.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

531.70

576.80

529.40

531.10

531.70

Diluted EPS ($)

-0.02

0.21

0.22

10.17

0.22

 

T = Trends Might Support the Industry

The good news is that Internet usage continues to increase as more people around the world become more in touch with technology. In addition to that, many experienced Internet users are now accessing the Internet on the go via tablets and smartphones. If there are more people on the Internet, then there is more potential for AOL.

The bad news is that European leaders are pushing for tighter regulations so companies like AOL can’t collect data from users based on their searching and shopping habits.

Conclusion

Forming an opinion on the future potential for AOL is relatively easy. If there are no significant moves made, then AOL will still survive, but it will not thrive. There is enough cash on hand to make a bold move, but it would be risky considering the state of the economy and the hit AOL’s balance sheet would take. At the present time, AOL is nothing more than an average stock. There are a multitude of better options.

AOL is currently a WAIT AND SEE.

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