UBS Securities upgraded its rating on shares of AOL Inc. (NYSE: AOL) to buy from neutral with a price target of $25. The brokerage attributed the upgrade on positive catalysts and compelling valuation.
We believe upside from traffic stabilization and increased monetization outweighs downside at these levels. Though we expect continued declines in the subscription business, we believe AOL’s strategy around premium content and high quality ads should benefit domestic display growth in second half of 2011, said Brian Pitz, an analyst at UBS Securities
We expect signs of a turnaround in first half of 2011 numbers. We are also tweaking our model for The Huffington Post acquisition, said Pitz.
Pitz expects AOL's domestic display revenue to grow in the low teens in second half of 2011, roughly in-line with the industry. Pitz believes these growth rates are achievable given significant strides in monetization.
Pitz said that AOL’s Project Devil ads garner CPMs (or pricing) in excess of $30, well above the rates for traditional banner advertising. In addition, recent recognition of AOL ad formats via IAB awards could create the opportunity for the industry to accept these formats as a standard, where AOL would have the first mover advantage.
We believe AOL is attractively valued (3 to 4 times of our EBITDA estimates); this view is supported by our sum of the parts valuation. Using a discounted cash flow, we value the legacy subscription dial-up business at roughly $14 a share. Adding back about $4 a share of net cash yields a total of $18 per share effectively assigning very little value to the advertising business, said Pitz.
However, the brokerage lowered its 2011 EPS estimate for AOL to $0.85 from $1.27, and its 2012 estimate to $0.99 from $1.04.
AOL stock is trading up 2.58 percent at $19.46 on the NYSE at 10:11 am EDT.