Focus on AOL
Interview: Loomis Sayles---Jim Carroll---Portfolio Manager
>> a day on wall street, let’s run down the closing numbers for you. dow jones industrial average up 61 points at 9,158. the s&p up nine, the nasdaq better by 24. new york stock exchange volume, 1.4 billion shares with advancers outpacing declines. on the nasdaq it was 1.7 billion shares and two to one margin in favor of the gainers. the wilshire 5000 showing a rise of nearly 1%. that’s the measure of the market. quick look at bonds in the meantime. they were up as well, 10-year note up 22/32, yielding 1.2%. five-year note up 13/32 at 2.98%. on the shorter end the three-year note was up a quarter point, 1.98%. looking at currencies, the activity was fairly quiet as far as the change in the dollar’s charge. meantime a.o.l. time warner is set to report second quarter before the start of regular trading tomorrow morning. our next guest says the bar has been lowered so much in terms of expectations for this company that it’s a good place for them to build up from. jim carroll’s portfolio manager overseeing 1.5 billion at the large-cap value team at loomis sayles. his company has 4.3 million shares of a.o.l., many in the value fund. he joins us from southfield, michigan. welcome.
>> thank you, lane.
>> good to talk to you today. before we get to a.o.l. i want to ask you, because we seem to have a trend developing here in the after-the-bell earnings news we’ve seen today where 10 of the companies have come out and raised their forecasts for the current quarter. are you getting a sense from following all these names that you do in the market, that things are turning a corner? >> it’s been clear to us for some time, lane, that this economy is beginning to recover. i would also say that managements have learned to keep expectations at very low levels following the disappointments we’ve seen in the three-year bear market. so it’s a combination of mmpts learning to live with what’s going on, and lowering expectations, and also the economies getting better.
>> expectations raised in this post market situation by amazon.com, ask jeeves and doubleclick all in the internet arena. what do you expect from a.o.l. earnings tomorrow when they report?
>> i think we are going to see a quarter that shows some solid improvement from the really really disappointing results of earlier this year. you know, we are expecting kind of consensus numbers here, $10.5 billion in revenue, and 10 cents a share in earthquakes earnings. there is a good chance they could slightly beat that, but i think we’ve seen some clear turns in some of their businesses, particularly their exposure to the ad side of the business with upfront ad commitments running ahead of expectations in the network business, at turner and also at w.b. networks. also the film business with success of the matrix reload is doing well, and there mass been a fair amount of heavy duty cost cutting going on at a.o.l. that i think is going to surprise some people in terms of the ebitda numbers they report.
>> talk about broadband subscribers. you are expecting a continued loss on that end of the business. should that be a concern for investors here or is it too small of an issue?
>> it is a concern, and the, you know, a.o.l. lost $289,000 subscribers in the first quarter. i expect that to be significantly higher in the second quarter. but we are talking about narrow band, not broadband, and we are getting growth in the broadband business. i think the main thing here is that this was a business that management did not admit that they were facing a wall here up until very recently, so they are now bringing down the costs and improving ebitda expectations here despite the fact that they are losing subscribers. the other thing to keep in mind is there is a lot of exposure here to the ad business that has been a disappointment, and i think will turn here soon.
>> a.o.l. has been pushing a big broadband effort trying to get people to stay with a.o.l. even as they sign on to broadband through their cable provider or through dsl. that’s not being seen as being very successful right now.
>> that’s correct. it’s early and their focus is going to be ong content for that broadband unit, which they hopefully will be able to detective rentiate them from kpets, too early to tell. but keep in mind this is a stock that was severely oversold. the shorts had a field day here. they referred to it as aohell. i don’t think we are in heaven yet, maybe pergtory. but things are starting to improve. this company still sells 10.6 times 2003 ebitda. fox is at 14, viacom at 14, disney at 13.5. so you’ve got improving management credibility.
>> what kind of price target would that put it in at the end of the year?
>> our price target is in the mid 20s. that would take it to about 12 to 12.2 times ebitda. i think it could be better than that.
>> jim carroll, thank you very much, portfolio manager with loomis sayles where they own an awful lot of a.o.l. where they hope to see that stock price rise. america west holdings, parent company of america west airlines reported its earnings earlier today, the stock is up over 400% so far this year. did the earnings justify the rise in the stock ? talk to the company’s c.e.o. douglas parker when we return.
