AOL (NYSE:AOL) is one of the world's largest brand companies. It creates original content that engages audiences on a local and global scale. It is divided into multiple segments, most notably the global advertising and global search groups. The former was driven by global advertising revenue growth in the last quarter.
In the past month, AOL has been in the headlines for its attempt to acquire Adap.tv. Over the same period, shares of AOL have fallen and currently rest over $34 a share. Around nine months ago, shares were trading higher, reaching a price of $43.93 a share. The present decline should have value hunters flocking to this stock, as many analytical measures point out that now may be the best time to focus research tools on AOL.
In the quarter, revenue grew 2% year-on-year. The company's operating income, net income, and diluted EPS grew significantly, favorably impacted by AOL's patent transaction with Microsoft. The company's global advertising revenue grew 7% year-on-year. Its global search revenue grew 8%. The company's brand group display revenue grew 9% year-on-year. The AOL network revenue also increased 5% year-on-year, driven by growth in third-party network revenue. However, due to fewer domestic brand access subscribers, the company's membership group revenue declined year-on-year.
In the next five years, Wall Street estimates that AOL's EPS will grow by an annual rate of 12.97%, compared with 9.30% for the S&P 500. Moreover, Yahoo (NASDAQ:YHOO), one of the company's primary competitors, will experience smaller EPS growth at 11.60%. Google (NASDAQ:GOOG) will however show bigger growth at 14.52%.
Interestingly enough, price multiples show that investors should take notice of this opportunity. By looking at AOL's price-to-sales ratio (1.21), we see that it is cheaper than 5.19 for Google and 5.92 for Yahoo. With a return on assets of 6.23%, it is more profitable than Yahoo at 3.09%. Its cash per share at 6.30 is also bigger than 2.58 for Yahoo. At a beta of 0.95, AOL is less risky than Google (1.1).
It should be pointed out that AOL has a debt equity of just 4.82. Even though this is larger than 0.35 for Yahoo, it is less than the industry average (19.3), sector average (111.89), and Google's debt equity (10.40). The stock is expected by Wall Street to show an EPS of 1.86 next year, compared with 1.70 for Yahoo.
By the end of the third quarter, AOL expects to close its Adap.tv acquisition. When this occurs, the combined companies will become the only global company with a full end-to-end solution for publishers and advertisers. From a macroeconomic standpoint, the fewer domestic brand subscribers have certainly not helped AOL's shares, but the estimated growth in global cloud IP traffic will pave the way for a bullish trend that will be in the company's favor.
Institutional investors and insiders
Looking at the institutional and hedge fund sector, a manager such as D.E Shaw has over two million shares in the company. Vanguard Group owns over four million shares, while RS Investment Management owns 4.2 million shares. Institutional and hedge fund investments show that a company is stable.
Moving to insiders, seven open market purchases of the stock have been made in the last six months, compared with 14 insider sales. The total number of insider shares bought is 30,289, compared with 27,466 for sold shares. Additionally,, insiders retain a substantial amount of shares, meaning they have faith in the company.
Analysts also have faith in the company's progress. UBS initiated work on the company with a buy rating on a price target of $44.00 a share. Also, Barclays upgraded the stock to overweight on a price target of $44.00 a share.
We could go on and on about AOL, especially when factoring in its growth prospects - but we're likely beating a dead horse. The company will grow its earnings with the Adap.tv acquisition. Though the fewer domestic subscribers will pose a temporary problem, it will not be a permanent one. Citing this reason, AOL is good bet to remain relevant in the information providers industry in the long term.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.