Is AOL Overvalued?

With shares of AOL (NYSE:AOL) trading at around $38.14, is the company 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

AOL has been receiving a lot of positive attention recently, but is all that justifiable?

AOL.com delivers content and publishes websites such as HuffingtonPost.com, TechCrunch.com, and StyleList.com. Most people don’t take advantage of Alexa.com, which is a site that provides information on the performance of a website. Looking at charts on Alexa.com is just like looking at a stock chart. The traffic numbers for a website can help indicate where it is going. Is it gaining traction or losing traction? Is time-on-site improving or weakening? How about pageviews-per-user? Bounce rate? These are just some of the stats that are available. In this case, we’ll keep it simple. We’ll just look at the two-year trends for traffic rankings.

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In regards to traffic rankings, AOL.com has seen a steady decline over the past two years. Over the past several months, that decline has evened out a little, but it’s still not a pretty picture. How could it be a pretty picture with all the competition that’s out there, including Google (NASDAQ:GOOG), Yahoo (NASDAQ:YHOO), Microsoft Corporation’s (NASDAQ:MSFT) Bing, and now Facebook’s (NASDAQ:FB) Graph Search? AOL.com has its work cut out for it in this area. TechCrunch.com and StyleList.com have also seen steady declines in traffic rank over the past two years. The only bright spot is HuffingtonPost.com, which has seen slow yet steady improvements over the past two years…

Now that the negatives are out of the way, let’s take a look a list of positives for AOL:

  • Effective cost-cutting measures
  • Returned $1.1 billion of cash to shareholders in 2012
  • $100 million repurchase program likely to be implemented in second half of 2013
  • Reduced share count by 30 percent over last three years
  • Average price target of $40.14
  • Strong cash flow
  • Estimated 27.1 percent annual EPS growth over next five years

A lot would need to go right for AOL to achieve 27.1 percent annual EPS growth over the next five years. That seems like a very ambitious number. More important, where’s the revenue growth? We’ll get to this in the Earnings section.

For now, the chart below will compare fundamentals for AOL, Google, and Yahoo. These three companies differ in size. AOL has a market cap of $2.94 billion, Google has a market cap of $263.15 billion, and Yahoo has a market cap of $25.74 billion.

AOL

GOOG

YHOO

Trailing   P/E

3.40

24.78

7.13

Forward   P/E

21.68

14.93

19.31

Profit   Margin

47.84%

21.40%

79.12%

ROE

48.46%

16.61%

29.06%

Operating   Cash Flow

$365.60 Million

$16.62 Billion

-$281.55 Million

Dividend   Yield

N/A

N/A

N/A

Short   Position

14.50%

1.90%

2.40%

 

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Strong    

The debt-to-equity ratio for AOL is stronger than the industry of 0.10. Debt-to-equity ratios throughout the industry are strong.

Debt-To-Equity

Cash

Long-Term Debt

AOL

0.05

$466.60 Million

$105.90 Million

GOOG

0.10

$48.09 Billion

$7.21 Billion

YHOO

0.03

$4.18 Billion

$37.00 Million

 

T = Technicals Are Strong

Other than the past month, AOL has outperformed Google and Yahoo for every time frame listed below. This is impressive, but this isn’t likely to be a long-term trend.

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1 Month

Year-To-Date

1 Year

3 Year

AOL

3.98%

28.71%

132.90%

74.18%

GOOG

-1.03%

12.79%

24.43%

40.27%

YHOO

6.24%

17.14%

53.15%

43.09%

 

At $38.14, AOL is trading above all its averages.

50-Day   SMA

34.89

100-Day   SMA

34.04

200-Day   SMA

33.06

 

E = Earnings Have Been Impressive          

Earnings have been impressive, but revenue trends are a cause for concern over the long haul.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

4.15

3.25

2.42

2.20

2.19

Diluted   EPS ($)

-14.42

2.35

-7.34

0.12

11.21

 

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

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   millions

576.80

529.40

531.10

531.70

599.50

Diluted   EPS ($)

0.21

0.22

10.17

0.22

0.60

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

Internet information providers have been performing well for several years, but this is a hot and cold industry. Competition has also become fierce. If the economy holds its own, then all is well. If the economy weakens, then there won’t be enough room for all the current players to succeed.

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Conclusion

Many numbers and developments point to good upside potential, but while the immediate future might look promising, the long-term picture is questionable. EPS growth is impressive, but revenue is essential for true growth.

All factors considered, AOL is a WAIT AND SEE.

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