Wednesday, April 28, 2010

AOL's Free Cash Flow Yield has come down. Just not in the manner we'd like...(AOL)

Ugh. I generally prefer to buy at a high Free Cash Flow Yield(FCFY%) and sell when it goes lower. The preferred way (duh!) for that yield to drop is for the shares to rise. In AOL's case, that yield has fallen as I re-adjust expected Free Cash Flow downward. Fortunately, buying at a FCFY% over 30% gives us room for error, which is why w're still up 2% on this trade despite this big slip-up..

Shares of AOL - which we bought on December 8th at $23.50 - fell 15% today after reporting a surprisingly weak earnings figure. The company achieved one goal (cost-cutting) but gained another (ad sales practically "frozen" on the sales force reductions).

From the release:
“AOL continues to make progress against our long-term objective of becoming an internet growth company. Our results highlight the accomplishment of our first goal in AOL’s turnaround which was to significantly reduce AOL’s cost structure,” said Tim Armstrong, Chairman and Chief Executive Officer. “While our restructuring had an impact on Q1 advertising results, we are encouraged by the advertising market's recent strength. We are now entering the second phase of AOL’s plan which is to greatly improve the consumer experience, scale the advertising systems and teams, and aggressively pursue our strategy in the marketplace.”
Among the few decent figures from this quarter was the reduction in churn (adios) rate, to 3%:

Advertising was crushed, as the sales force is dealing with a major shakeup:

Free Cash Flow for the quarter was $125million, but was held down by continued restructuring costs. The key for us is what to expect for 2010/2011 Free Cash Flow. Along with the expected cash from AOL's sale of their ICQ instant messaging business, one could buy the company for about $2.1billion. A super-super-low estimate for Free Cash Flow would be $450million, and even then our FCFY% would be 21%. I still think Free Cash Flow will come in higher than that, so we have a yield closer to 30%.

Copyright 2010 TheAlphaNinja

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