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Why AOL, Inc. Slumped This Morning

By Brian D. Pacampara, CFA – Feb 7, 2014 at 1:31PM

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Does this analyst make a good case or is it just more noise from Wall Street?

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of AOL, (NYSE: AOL) slumped 3% this morning after Bank of America downgraded the online content company from buy to neutral.

So what: Along with the downgrade, analyst Joyce Tran lowered her price target to $50 (from $56), representing about 6% worth of upside to yesterday's close. While growth investors might be attracted to AOL's strong revenue of late, Tran thinks that the stock's appreciation potential remains limited given management's disappointing cash flow outlook.

Now what: Bank of America now expects AOL to post 2014 full-year EPS of $2.02 on revenue of $2.48 billion, down from its prior view of $2.55 billion and $2.41 billion, respectively. "While AOL had turned around the advertising business with revenue and profit growth and had a record 4Q, we think our thesis had played out and based on its 2014 outlook, we no longer see upside to our estimates," Tran noted in a report to investors. When you couple that uninspiring outlook with AOL's strong share-price run over the past six months, I'd agree that the risk/reward looks pretty balanced at this point.

Brian Pacampara has no position in any stocks mentioned, and neither does The Motley Fool. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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