Yahoo! ( YHOO: Nasdaq)
By FBR & Co. ($40.18, Oct. 22, 2014)
We are upgrading Yahoo! to Outperform from Market Perform and
raising our price target to $50 from $40.
Our upgrade of Yahoo (ticker: YHOO) is based on four factors: 1)
Management appears to be going into motion on delivering a tax
shield on Asian assets, a significant potential value driver that
we think could be worth $13 a share; 2) The time frame for sharing
plans has been pulled forward, to be revealed next quarter; 3)
Progress on new initiatives (e.g., social, mobile, video, and
native) are showing traction and starting to overcome core business
pressure; and 4) We see attractive asymmetrical risk/reward with an
upside/downside ratio of three to one (a 24% potential upside case
of $50, and an 8% potential downside case of $37).
Management's comments were incrementally more positive on
Yahoo's ability to shield taxes on future Alibaba ( BABA) stock
sales. Yahoo is looking at all options and is optimistic that it
can affect a structure that makes sense from a tax and economic
perspective. We believe that such structures could include a
spin-split, a cash-rich split, and/or raising debt against Asian
assets. Under the terms of Yahoo's Alibaba agreement, Yahoo can
take action in advance of the lockup expiration to create a
structure that can minimize taxes. Yahoo intends to disclose its
plans on or before its next earnings release versus our original
expectation of next summer.
Yahoo's fourth-quarter net revenue guidance range (excluding
traffic acquisition costs (TAC)) of $1.14 billion to $1.18 billion
is in line with consensus of $1.17 billion. Adjusted earnings
before interest, taxes, depreciation and amortization (Ebitda)
guidance of $340 million to $380 million is above Wall Street's
$348 million estimate at the midpoint of $360 million.
Constructively, the implied fourth-quarter Ebitda margin of 31.0%
is better than the consensus outlook of 29.9% as the company
emphasized the efficiency measures it has recently implemented
including reducing contractor head count, consolidating or closing
offices, and reallocating personnel.
Yahoo's third-quarter revenue grew 1% (excluding TAC). In order
to grow, new initiatives must more than offset roughly a $60
million quarterly slide in Yahoo's display ad business. For
example, native is expected to contribute $80 million of revenue in
the fourth quarter. Yahoo revealed that GAAP mobile revenues
surpassed $200 million in the third quarter and will likely exceed
$1.2 billion for the full year (these figures are pre-TAC and
mobile TAC was not disclosed). Also notable, Yahoo's comments on
its search partnership with Microsoft ( MSFT) did not indicate any
intention to opt-out when the option becomes available in 2015.
Yahoo made its case that it is a good steward of capital,
returning $7.7 billion through buybacks versus $1.6 billion in
acquisitions during [President and Chief Executive] Marissa Mayer's
tenure. Yahoo reduced its share count by 24% at an average
repurchase price of $26.37 a share. However, the company did not
increase the floor of 50% of the proceeds from Alibaba's initial
public offering it plans to direct to stock buybacks.
Management made an effort to show that it has a cohesive and
value-enhancing merger and acquisition (M&A) strategy segmented
into talent acquisitions, building block technology acquisitions,
and larger strategic acquisitions, which to date have consumed 80%
of M&A dollars. Tumblr is now on track to deliver $100 million
in revenue and positive Ebitda in 2015.
-- William Bird
-- Marvin Fong
The companies mentioned in Hot Research are subjects of research
reports issued recently by investment firms. Their opinions in no
way represent those of Barrons.com or Dow Jones & Company, Inc.
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