What Is AOL Lacking?

With shares of AOL Inc. (NYSE:AOL) trading at around $36.54, 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

AOL is no longer cool. This is a company that has made some strategic moves over the past several years, but the brand is still lacking. When people hear the name “AOL,” they think archaic. AOL must do something to improve its image if it really wants to make substantial improvements in traffic and revenue.

AOL’s traffic stats for the past three months have been ho-hum. According to Alexa.com, AOL.com pageviews-per-user declined 1.99 percent, time-on-site declined 2 percent, and bounce rate (only one page view per visit) increased 2 percent.

Over the past three months, HunffingtonPost.com pageviews-per-user increased 2.3 percent, time-on-site declined 1 percent, and bounce rate increased 1 percent.

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Over the past three months, Games.com pageviews-per-user declined 4.30 percent, time-on-site increased 1 percent, and bounce rate increased 1 percent.

However, Q1 traffic and subsequent revenue impressed on a year-over-year basis:

Unique Visitors: Increased 3 percent

Global Display Revenue: Increased 8 percent

Third Party Network Revenue: Increased 10 percent

Global Search Revenue: Increased 9 percent

Subscription Revenue: Decreased 9 percent

Most importantly, AOL has suffered consistent declines in revenue on an annual basis. AOL has made all kinds of moves to improve the bottom line, which has helped lead to stock appreciation, but for long-term success, there must be growth. Q1 did show revenue and earnings improvements on a year-over-year basis, but not on a sequential basis.

This is all related to laying off employees and company culture. AOL has been laying off employees for years. This has helped cut costs and boost profits, but it has also lead to a shaky company culture. It’s not easy to work at top potential when the guillotine is always in operation. According to Glassdoor.com, 52 percent of employees would recommend the company to a friend. In regards to leadership, 66 percent of employees approve of CEO Tim Armstrong.

The chart below compares fundamentals for AOL, Google Inc. (NASDAQ:GOOG), and Yahoo Inc. (NASDAQ:YHOO).

AOL GOOG YHOO
Trailing P/E 3.12 26.41 7.55
Forward P/E 19.97 16.61 17.01
Profit Margin 47.86% 20.92% 82.55%
ROE 48.17% 16.36% 29.98%
Operating Cash Flow 386.30M 16.56B -360.33M
Dividend Yield N/A N/A N/A
Short Position 11.10% 1.50% 2.80%

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

T = Technicals Are Mixed

AOL has outperformed Google and Yahoo over a three-year time frame. However, it has lagged its peers over the past year, especially as of late.

1 Month Year-To-Date 1 Year 3 Year
AOL -4.50% 23.40% 52.90% 99.03%
GOOG 8.99% 24.47% 44.47% 86.53%
YHOO 6.73% 30.75% 69.18% 68.14%

At $36.54, AOL is trading below its 50-day SMA and above its 200-day SMA.

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50-Day SMA 38.55
200-Day SMA 35.30

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio for AOL is stronger than the industry average of 0.10. Debt isn’t a concern.

Debt-To-Equity Cash Long-Term Debt
AOL 0.05 467.80M 104.20M
GOOG 0.10 50.10B 7.38B
YHOO 0.00 3.01B 36.00M

E = Earnings Have Improved

Annual earnings have made significant improvements. However, annual revenue has been in steady decline.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 4,166 3,257 2,417 2,202 2,192
Diluted EPS ($) -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 improvements in revenue and earnings.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 529.40 531.10 531.70 599.50 538.30
Diluted EPS ($) 0.22 10.17 0.22 0.41 0.32

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

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Conclusion

AOL has made wise acquisitions while cutting costs over the past few years, but despite the impressive run in the stock, it still hasn’t been enough for long-term growth and success. AOL has potential to be great again, but it must make a big splash somewhere in order to improve the brand.

AOL is a WAIT AND SEE.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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