The stock price of AOL, Inc. (NYSE:AOL) surged by more than 7 percent to $38.87 per share on Wednesday around 2:00 PM in New York after analysts from Barclays Equity Research upgraded their price target to $44 per share and overweight rating for the company.
Barclays Equity Research analyst, Anthony DiClemente and Ryan Ripp believe that will experience a significant growth in earnings as the global internet company returns to modest revenue growth as it continues to implement its cost cutting initiatives. The analysts’ new estimate for AOL’s EBITDA for FY 2013 is $441 million and $492 million for FY 2014.
In their note to investors, DiClemente and Ripp explained that AOL, Inc. (NYSE:AOL)'s cost cutting measures and incremental margin could drive the growth of its EBITDA. According to them, the internet company managed to increase its EBITDA modestly in 2012 despite the declines in its high-margin subscription business by improving its segment margins and cutting its overhead costs.
The analysts believe that AOL, Inc. (NYSE:AOL) will continue to increase as the company shut down or bring hyper local offering Patch to breakeven margins by 2014 as promised, which should yield an incremental $100M plus of EBITDA vs. 2012. According to them, AOL’s overhead cost reductions can add $100M plus to EBITDA annually over the next two to three years, and the slight incremental margin of each of the company’s ex-Patch and AOL Networks segments can add $10M plus to the consolidated EBITDA every year.
DiClemente and Ripp believe that the modest revenue growth of AOL, Inc. (NYSE:AOL) is sustainable based on their expectation that the moderate declines of the company’s membership revenue will be offset by low-double-digit growth of AOL Networks and high-single-digit growth in its Brand Group.
The analysts wrote, "The biggest profitability lever that AOL can pull is to continue to show operating operating leverage in its Brand Group, which encompasses the majority of the company's search and display revenue...We note that AOL improved EBITDA in this segment by $15 million Y/Y in 2012 despite introducing new products and expanding into new regions."
In addition, DiClemente and Ripp believe, "AOL has already largely built the content properties against which it plans to sell advertising and thus incremental revenue should be accretive to margins. The analysts also expect AOL, Inc. (NYSE:AOL) to complete its $100 million shares buyback in the second quarter of 2013.