Barclays Capital analyst Douglas Anmuth laid out his earnings estimates for soon-to-be-independent AOL on Tuesday, coinciding with the stock trading on a "when-issued" basis on the New York Stock Exchange. (A when-issued listing is standard practice ahead of a spin-off in order to ensure a smooth transition for market participants.)
Anmuth, who was not immediately available to talk, didn't issue a price target or rating for AOL shares, but he sees them being fairly valued at $35 to $39 a pop, putting the market capitalization at $3.8 billion to $4.2 billion.
As a company in transition, AOL won't really have any direct peers. It's not looking to become a search company like Google (GOOG) or a portal/aggregator such as Yahoo (YHOO). And it's getting away from being an Internet service provider like Earthlink (ELNK). Still, to put that market cap in some perspective, Google's is at $184 billion, Yahoo stands at $21 billion and Earthlink is worth $886 million.
"We expect AOL's revenue and profit declines will moderate over the next few years, but we do not project growth in our model in any year through 2014," Anmuth wrote. For 2010, the analyst sees pro forma earnings coming in at $4.38 a share on a 13% drop in revenue to $2.8 billion. In 2011 he sees pro forma earnings dropping to $4.31 a share on a 7% decline in revenue to $2.6 billion.
Interestingly, Anmuth assigns a forward multiple of roughly eight to nine times 2010 pro forma earnings. Again, the newly independent AOL won't really have any direct peers, but that does appear to be a pretty low relative valuation. Earthlink gets a multiple of 11, Google fetches 22 and Yahoo goes for 30 times forward earnings.
What's this all mean? (Full disclosure, apart from a couple of retirement accounts, I don't own any securities.) If Anmuth is correct and AOL won't have revenue or earnings growth for several years, any upside in the stock will come from multiple expansion. In other words, the market will hunger for any scrap of better-than-expected news.
