Is Yahoo’s Stock About to Go for a Ride?

With shares of Yahoo! Inc. (NASDAQ:YHOO) trading at around $19.93, is YHOO an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Yahoo recently beat Q4 expectations thanks to ad prices and overseas investments. Q4 EPS came in at $0.23 versus an expectation of $0.27. Confused? Based on Yahoo’s press release, it would be a beat if South Korea operations and other accounting items weren’t factors. If those factors were excluded, then EPS would have come in at $0.32. As far as revenue goes, it came in at $1.35 billion compared to $1.32 billion for the same quarter last year. FY2012 EPS came in at $1.17 on revenue of $5.08 billion. Guidance was light. Q1 revenue is expected to come in between $1.07 billion and $1.10 billion. Full-year revenue is expected to come in at $4.5 billion to $4.6 billion.

Markets are at 5-year highs! Discover the best stocks to own. Click here for our fresh Feature Stock Pick now!

All of the earnings numbers are important, but the real story here is CEO Marissa Mayer. She has been looked at by investors as a savior, which has a lot do with her Google (NASDAQ:GOOG) pedigree. Her goal is to make Yahoo a premier destination online. The irony here is that this goal has already been accomplished. Yahoo is the fourth-most visited site in the world. The real challenge is how to increase revenue through monetization methods. She has had some success since her tenure was inaugurated. Employee morale is high. It has been reported that 95 percent of employees are optimistic about the company’s future.

There has also been a 10 percent user increase in Yahoo email, an interesting tidbit to be sure. How does email usage increase 10 percent so fast? It’s not likely that people are at dinner parties or playing golf and raving about Yahoo email to their friends and acquaintances. This number can easily be manipulated, but we will give the benefit of the doubt. CEO Marissa Mayer is also focused on mobile and social networking. Focus is great because it’s a start, but we can talk about this more once there are substantial results. She has formed important partnerships with Samsung, Wenner Media, and NBC Sports. In addition to that, she has made improvements to Flickr. Overall, CEO Marissa Mayer seems to be doing well so far, but it’s still too early to judge.

The sale of Yahoo’s stake Alibaba Group led to a $7.6 billion windfall, of which $1.5 billion went to shareholder buybacks at an average price of $18.24. Many people feel as though these buybacks are what have been lifting the stock price, and that the performance of the stock isn’t an accurate indicator of the strength, or lack thereof, of the business. We will touch on this point in the Conclusion section. For now, let’s take a look at some important numbers for Yahoo…

E = Equity to Debt Ratio Is Strong

The debt-to-equity ratio and balance sheet for Yahoo are both very strong. In an era where debt has suddenly become attractive again – despite the warnings of the financial crisis – Yahoo is fiscally sound.

Debt-To-Equity

Cash

Long-Term Debt

YHOO

0.00

$8.41 Billion

$127.53 Million

AOL

0.03

$867.10 Million

$60.80 Million

GOOG

0.08

$48.09 Billion

$2.99 Billion

 

T = Technicals on the Stock Chart Still Qualify As Strong

Yahoo is taking it on the chin a little bit today, but the stock has performed well over the past three years. However, it has underperformed AOL Inc. (NYSE:AOL) and Google for every time frame listed below.  

1 Month

Year-To-Date

1 Year

3 Year

YHOO

2.51%

0.45%

27.00%

33.18%

AOL

5.25%

4.61%

123.40%

49.78%

GOOG

7.55%

6.43%

29.80%

42.06%

 

At $19.78, Yahoo is currently trading above all its averages.  

50-Day SMA

19.28

100-Day SMA

17.66

200-Day SMA

16.54

 

E = Earnings Have Been Steady

Earnings have been steady on an annual basis, but they haven’t been overly impressive. That’s Yahoo in a nutshell. Revenue has been sporadic. The chart below doesn’t include FY2012. Those numbers can be found in the Catalyst section.

2007

2008

2009

2010

2011

Revenue ($)in billions

6.97

7.21

6.46

6.33

4.98

Diluted EPS ($)

0.47

0.29

0.42

0.90

0.82

 

We already know what happened this quarter. Now let’s take a look at what happened in previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.22

1.32

1.22

1.22

1.20

Diluted EPS ($)

0.23

0.24

0.23

0.18

2.64

 

T = Trends Support the Industry

Search will always be a strong industry, and Yahoo is one of the leaders. There is room for improvement, but there are also increased threats. Since Yahoo is looking to be a bigger player in mobile as well as social networking, trends definitely support the industry. However, it’s difficult to see how Yahoo would effectively monetize social networking.

Conclusion

Yahoo is misunderstood by many because they’re expecting 1990’s-like returns. It’s difficult for some people to let go and admit that Yahoo’s exceptional growth phase is over. At the same time, that doesn’t mean Yahoo is a bad stock. This is still a company with impressive margins, strong cash flow, a very strong balance sheet, and good management. The valuation is also fair at the moment. In regards to buybacks pushing the stock price up, that shouldn’t be looked at as a negative. If Yahoo did it once before and it worked, then Yahoo is likely to do it again. This would benefit a shareholder. As far as light guidance goes, that has more to do with the economic environment than anything else. This has been a common trend of late when it comes to H1 2013.

Yahoo is a long-term OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.