AOL: Barclays Ups to Buy on Cost-Cutting, Buybacks

Shares of AOL (AOL) today rose $3.03, over 8.4%, to $39.20, after Barclays Capital‘s Anthony DiClemente raised his rating on the shares to Overweight from Equal Weight, and raised his price target to $44 from $38, writing that the Street’s Ebitda estimates can go higher with even modest revenue growth as AOL cuts costs.

DiClemente is modeling “gross revenue” this year, before subtracting the cost of traffic acquisition, of $2.27 billion, with Ebitda of $440.6 million, and EPS of $1.60. That compares to a Street consensus for $2.26 billion, $425 million, and $1.60 per share.

AOL is balancing the decline of its ancient dial-up subscriber base with investments in its media properties, the so-called “Brand Group,” writes DiClemente, and that balance can continue to bring improvements in Ebitda:

Despite declines in its high-margin subscription business and investments in content at its Brand Group and in technology at its AOL Networks business, in 2012 AOL managed to modestly grow EBITDA through the elimination of $20 million of overhead costs and modest margin improvements in its Brand Group and AOL Networks segments. We believe this can continue as 1) shutting down or bringing hyperlocal offering Patch to breakeven by 2014, as promised, should yield an incremental $100M+ of EBITDA vs 2012; 2) overhead cost reductions can add $10M+ to EBITDA annually the next 2-3 years; and 3) modest incremental margin in its Brand Group ex-Patch and AOL Networks segments can each add $10M+ to consolidated EBITDA annually. We see
particularly high upside to 2014 consensus, as we believe the AOL�s promise to shutdown Patch or take on a partner to make the business breakeven, should it not achieve its 4Q13 profitability goal, should alone lift 2014 EBITDA by $70 million Y/Y. Our new EBITDA estimates of $441 million and $492 million for 2013 and 2014, respectively, are well above consensus of $423 million and $449 million.

DiClemente also likes the comes intentions for share buybacks:

AOL returned $1.1 billion of cash to shareholders in 2012 using the proceeds of its patent sale and the remaining $40 million authorization on its buyback program. On its 4Q12 earnings call, AOL announced that it had approved another $100 million repurchase program, which we believe the company intends to return in 2013. Given that in its 10-K the company does not expect the ASR to be completed until 2Q13, we believe the vast majority of the $100 buyback will have to be completed in the second half of 2013, providing a bid for AOL shares in the market and thus potentially creating a catalyst for shares. AOL has proven its commitment to capital returns, reducing its share count nearly 30% in the last 3 years, and we believe the company remains committed to doing so in the future.