SunTrust On AOL: Good Quarter, But Remaining Neutral

AOL (NYSE: AOL) reported a positive second quarter result on Wednesday, highlighted by a top and bottom line beat.

After falling one percent year over year in the first quarter, AOL managed to increase its search revenue by six percent to $98.9 million. Display ad sales saw a one percent drop to $144.1 million, an improvement from the third quarter's three percent decline. Third-party platform revenue rose 60 percent in the quarter to $194.3 million, an improvement over the first quarter's 55 percent rise. However, traffic acquisition costs rose to $158.8 million from $96.3 million a year ago.

Subscription revenue declines of seven percent to $155.1 million marks an improvement over the 10 percent decline in the first quarter.

Despite improvements in many of AOL's revenue streams, Robert Peck of SunTrust Robinson Humphrey isn't fully convinced.

In a note to clients on Thursday, Peck reiterated a Neutral rating but did raise his price target from $38 to $44.

Peck noted that AOL “rebounded and delivered a strong second quarter” due to the Adap.tv acquisition and premium formats and videos and management's guidance of $500 million of OIBDA (Operating Income Before Depreciation and Amortization) with potential further upside.

Not all was positive, as Peck noted traffic acquisition costs was four percent higher than estimated and platform margins are a concern as management continues to invest in video and premium formats.

Peck found some positives in AOL's shareholder friendly activities. During the quarter, the company repurchased $50 million in stock and the board of directors approved an additional $150 million authorization.

“While we are incrementally encouraged by solid second quarter results, with operating trends again moving in the right direction, we maintain our Neutral opinion given low-single-digit net revenue growth and less runway for further cost rationalization,” Peck wrote, justifying his decision to stay on the sidelines for the time being.

Shares of AOL traded recently at $42.67, up 1.79 percent.