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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

AOL stock might be a buy, but wait

Universal Press Syndicate

Those who remember the old ticker symbol aren’t dreaming. AOL (NYSE: AOL) is back, now that Time Warner has spun off its problematic online arm.

The stock didn’t surge upon launch. Since Time Warner is distributing the shares to its investors, it’s understandable if many of them choose to cash out and treat the sale as a holiday dividend.

AOL has a lot to prove before it begins heading higher. Sure, it hired key executives from (“Motley Fool Rule Breakers” pick) Google and Yahoo to regain some dot-com sizzle, but it’s still a mess.

Revenue and operating profits fell by 23 percent and 50 percent, respectively, in AOL’s latest quarter. It shed 2.1 million subscribers and now has just 5.4 million. (It had 26.7 million in 2002.)

AOL has been focusing lately on ad-supported revenue. Unfortunately, ad revenue has taken a 22 percent hit over the past year. Even the display-advertising laggards are holding up better. Yahoo and IAC’s media and advertising revenue fell by 8 percent and 12 percent, respectively, during the same quarter.

Daring investors might keep an eye on AOL over the coming months. Once the Time Warner shareholders throw in the towel, there may be value remaining for a collection of online properties that still serve up a ton of page views and can be monetized more effectively.

Ask the fool

Q. A year or so ago, both ConocoPhillips and ExxonMobil had similar stock prices. But over the past year, ConocoPhillips is up about 2 percent, while ExxonMobil is down around 7 percent. What gives? – N.B., online

A. Though they’re in the same industry, they’re different companies, with different performances, assets and prospects. Their profit margins are different, as are their sales and earnings growth rates. Also, either or both might be over- or undervalued right now and may be headed up or down. Their prices being similar was just a coincidence.

Q. What’s the “time value of money”? – E.M., Cincinnati

A. It refers to how money’s value changes over the years. Imagine you’re offered a dollar today or a dollar in 10 years. Naturally, you’d prefer the dollar today. You could invest it and it would grow to more than a dollar in 10 years. Or you might buy a loaf of bread with it. In 10 years, due to inflation, a dollar will probably only buy a few slices of bread.

Stock analysts consider the time value of money when they use “discounted cash flow” (DCF) analysis to estimate the value of companies. (Warning: This is complicated but useful to know.) They create DCF models, estimating how much cash a firm will generate over time. Future earnings are then “discounted,” at a rate that can be tricky to determine.

As a simplified example, imagine that Buzzy’s Broccoli Beer (ticker: BRRRP) will generate $5 next year and you’re discounting that at 10 percent. Take 1 and add 0.10 (for the 10 percent), getting 1.10. Now divide $5 by 1.10 and you’ll get $4.55. So the “present value” of those future earnings is $4.55.

My dumbest investment

I took the advice of two people who should have known better: my CPA and my financial adviser. When I was 66, my CPA advised me to convert my traditional IRA to a Roth IRA. My financial adviser agreed. I paid a whopping tax on the conversion. Since I was heavily into stocks, I wanted to move my IRA into low-risk, fixed investments. When those investments languished, it occurred to me that the Roth was not the place to be conservative. I decided to take full advantage of its tax-free nature. My adviser agreed and put me into tech stocks. We all know what happened next. My IRA fell to a quarter of its original value. What a waste! – V.R.B., Trenton, N.J.

The Fool responds: Ouch. Converting to a Roth IRA is smart for many people, but not everyone. You need to consider your age and how long you think you’ll be leaving your investments in the Roth. Your ability to pay the taxes on the conversion matters, too. Learn much more about IRAs (which really can serve you well) at www.fool.com/retirement.