Thursday, March 09, 2006

Load up on Yahoo!

Yahoo! is the leader in one of the world's fastest growing markets and is the most visited site on the internet and most widely used portal. Sure, Google gets all the hype, but their search technology has put them in first, but the leapfrog effect is inevitable.

The company is trading at a 25% discount from a share price of $40, where I believe it belongs. Essentially, the two main elements of an investment thesis for Yahoo! are its growth potential and its extremely low valuation (only 25x earnings including their one-time capital gain from holding Google shares) and 40x earnings as evidenced by operating income (about $0.70 per share).

In terms of financial soundness, the company is supremely positioned. Current assets are over 2.8x current liabilties and debt to equity ratios are falling. Great management effectiveness ratios show that managers are responsible stewards of owners' capital. Asset turnover ratio increased almost 100 bps from 2004.

With 49% topline growth and an adjusted PE of under 40 (excluding one time charges), the recent 25% pull-back in in the valuation is compelling. We're loading up the trucks.


J. Collins said...

YHOO is actually more valuable than that.

All these calculations don't take into account:

* yahoo holdings in yahoo japan which is a separate company. yahoo US owns 30% of yahoo japan

* the recently established 40% interest in Alibaba. Alibaba is emerging as one of the Internet leaders in mainland china. If Baidu is any indication, Alibaba should be worth billions if/when it goes public.

I also think the current forward earnings estimate is too low due to the last quarter earnings miss (by one cent). By mid april we should know the first quarter earnings/share, conservatively multiply that by 4 (assuming no growth) and you should have a forward PE of about 40-46, again, assuming no growth which is obviously very conservative.

Factoring in growth of just 20% (also conservative) should bring the PE to below 40.

yahoo recently bought 8M of its own shares, their management seem to realize that at this price the upside is much bigger than the downside.