Archive: Yahoo! (YHOO)

DBD: Diebold Takeout Offer Making Me Look Stupid

I should probably learn to take the money and run more quickly. Back in December I wrote about Diebold (DBD) at about $33 per share and said investors should probably look elsewhere due to earnings quality concerns and what I considered to be unsustainable cash flows. That looked good until this morning, when the takeover offer from United Technologies (UTX) sent the shares up from $25 to $39.

In the interest of full disclosure, this is the third time in as many months that a takeover bid has made one of my bearish calls look stupid (at least temporarily.) In September I wrote bearish pieces on both Yahoo (YHOO) and Delta Airlines (DAL) at prices of $23.30 and $17.65, respectively. I no longer look stupid on Delta since their deal appears to have run aground.

Interestingly, of the three Delta was the only one whose management actually wanted the deal. We’ll have to see whether the Yahoo and Diebold hostile bids suffer the same fate.

Position: No financial positions in the stocks mentioned

Topics: Delta Air Lines (DAL), Diebold (DBD), Microsoft (MSFT), United Technologies (UTX), Yahoo! (YHOO) | No Comments

GOOG: Is Google a Value Stock?

This article is a reprint of my February 5, 2008 RealMoney column

In the wake of Google’s (GOOG - Annual Report) disappointing earnings results and Microsoft’s (MSFT - Annual Report) premium bid for Yahoo! (YHOO), I started wondering if Google might finally be cheap enough to consider buying on a contrarian/value basis.

Google generated $3.37 billion in free cash flow (cash from operations less capital expenditures) in 2007, sufficient for a 2.5% free cash flow yield based on the latest enterprise value estimate. That isn’t much less than the 2.8% yield on 5-year Treasuries, and the Treasury yield, unlike Google’s free cash flow, is not doubling annually.

It is also significantly higher than the 2.1% free cash flow yield Microsoft will capture if it succeeds in its $44.6 billion acquisition of Yahoo! On the other hand, if Microsoft truly manages to wring $1 billion in annual synergies from the deal and those synergies flow through to cash rather than just accounting earnings the yield for Microsoft would double. Since that is a lot of “ifs,” I’ll stick to the 2.1% number.

At a 2.1% free cash flow yield, Google would trade for $553. And that is assuming the company were truly similar to Yahoo!  In fact, Google is growing its revenue at more than 50% per year rather than Yahoo!’s 8.3%, and is estimated to grow its earnings per share nearly 33% annually over the next five years rather than 23% for Yahoo! If anything, Google should capture a much higher valuation than Yahoo!

For example, assuming both companies were to grow at the expected rate for five years and then at the same rate as the S&P 500 thereafter, they might both decline to a 15x P/E multiple over the five year horizon. In such a situation, the five-year price target for Yahoo! would be $19.50, while the five-year price target for Google would be $886. If anything, that scenario seems a bit conservative for Google and a bit aggressive for Yahoo! in my opinion.

The Downside

While there is no doubt that contextual search ads are a more desirable advertising venue since customers can monitor the results, I don’t buy the notion that Google can see increased ad spending during a recession. If ad budgets are cut, I think the revenue advertisers will be willing to pay for each click will go down. I accept that the search ads might be less impacted than other outlets, but just don’t believe that budgets formerly reserved for TV, for example, will be shifted to search.

I also think Yahoo! offers some insight as to the worst-case scenario for Google in a recession environment, based on what happened to Yahoo! in 2001. Revenues declined 35% in 2001, operating expenses continued to creep up, and free cash flow got hammered.

The comparison to Yahoo! during the tech bust is probably too conservative. Yahoo’s display ads in 2001 did not offer nearly the advertiser measurability that Google’s search ads provide. Further, Yahoo! stock was unfairly tainted by all of the other Internet stocks that didn’t deserve to trade at all, let alone at lofty multiples of sales. Still, I think there are useful comparisons to draw from such recent history.

I could see Google’s revenue declining as much as 20% year/year, which I don’t think many analysts give much credence. Its earnings would plummet in such a situation because Google continues to add operating expense. I don’t see $5.00 in EPS as being out of the question. But in 2001 Yahoo! ended up with a 100x P/E multiple against its 2002 earnings per share (the trailing earnings had gone negative.)

At 100x my recession-trough EPS estimate of $5.00, Google is fairly valued today.

Sure, history never repeats exactly. And sure, momentum could take Google significantly lower regardless of the logic (or lack thereof) in my analysis.

But to me, Google is starting to look like a value stock.

Topics: Advertising, Google (GOOG), Microsoft (MSFT), Services, Yahoo! (YHOO) | No Comments

YHOO: Nothing to Shout Yahoo! Over

Last September, I said I was skeptical about Yahoo (YHOO) in a post titled YHOO: Not Shouting Yahoo! Over Yahoo!

So, will Yahoo! reward a patient approach? It doesn’t look that way to me. Its free cash flow in 2006 was $700 million, half the level achieved in 2005. It is only good for a 2.3% free cash flow yield on the current enterprise value. That means essentially all of the return potential has to come from growth – which doesn’t seem like a safe bet given last year’s decline. Sure, the growth rate over the last five years is nearly 45% – but that is coming off of the lowest lows of the Internut Bust. The consensus five-year growth estimate is 24%, including a 20% decline in the current year. By implication, that means the subsequent four years would have to post average growth of nearly 40% annually. Color me skeptical. With an ROE of just 8.27%, assuming growth will be faster than that implies adding debt or issuing new shares unless they can somehow boost the ROE itself – a feat far easier said than done. Coincidentally (or not) that is about in line with the actual year/year growth rate in the latest quarter.

The latest earnings and guidance show that the skepticism was justified. The stock fell another 11% after hours, and is now down nearly 22% since my bearish call, compared with a 7.4% decline in the S&P 500.

Revenues were up – whaddya know – 8.3% and the new guidance midpoint calls for another 10% in 2008. Five year growth estimates have not budged but will now be far more difficult to meet.

Topics: Advertising, Services, Yahoo! (YHOO) | No Comments

My Picks for RealMoney are Off to a Good Start

This article is a reprint of my December 19, 2007 RealMoney column.

An Update of My September 2007 Stock Picks

  • My picks in September had winners and losers, but fortunately more of the former
  • Closing out my bearish stance on Office Depot (ODP)

I wrote six articles in September that included a bullish or bearish stock opinion, and with three months behind them I thought it was a good time to see how they performed and whether any changes were warranted. On the whole, the picks are playing out more or less as planned.

Motorola

On September 10, I wrote that if Motorola (MOT - Annual Report) could get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there Motorola shares would be worth nearly $23.

Instead, the cash flow position has continued to deteriorate, contributing to former CEO Ed Zander’s recent ouster. The stock is down 7.2% since the article was written, compared to just a 0.5% decline in the S&P 500.

Still, I think the issues at Motorola can be fixed by bringing the costs – particularly research, development and overhead – in line with the current revenue generation. Alternatively, activist shareholder Carl Icahn could push to break the company up into smaller pieces that might be acquired for a higher total than the current company is currently able to garner. Either way, I’m sticking to my guns on Motorola.

Yahoo

On September 11 I made a bearish call on Yahoo! (YHOO), saying I didn’t believe in the consensus growth estimates and that Yahoo isn’t generating enough cash flow today to make waiting for the recovery worthwhile — at least not for me.

Things haven’t gotten any better since then, and the stock has lost 1.1% – although that is a slightly better performance than the 1.7% loss in the S&P over the same period. I remain bearish on Yahoo.

Office Depot

On September 12, I made a bearish call on Office Depot (ODP), saying “things are likely to get worse before they get better.” Things got worse, and after the company missed earnings and delayed filing its required 10Q the stock has lost 23.3%, compared to a 1.7% decline in the S&P 500.

But I also said “it looks like a stock that will pay off in the end,” and I think the current downturn may have taken the worst out of the stock. I have written put options against the shares (a bet that has lost money) and I think there are more reasons to be positive than negative.

Think the worst of the housing downturn is over? Office Depot’s solid cash flow should make it a safer play than homebuilders or financials. Think small-business tech spending will rise? Office Depot’s P/E is a fraction of Dell’s (DELL).

Office Depot could still have some downside, and I don’t expect a quick recovery. But at current valuations I can no longer justify a bearish position, so I’m closing out that call.

Delta Airlines

On September 17 I made another bearish call, this time against Delta Airlines (DAL). Although the stock looked cheap, after I made some adjustments for earnings quality it looked more like a company recently emerged from bankruptcy (which it is.) The stock has lost 17.7% since that call, compared to a 2.1% decline in the S&P.

Short term, anything can happen as airlines have tons of leverage that can lead to wild swings in profitability in pricing. But long-term I don’t think the major airlines have any better prospects than they did before the previous 10 or so bankruptcies, and I remain bearish.

Apple

I weighed in favor of the bulls for Apple (AAPL) on September 17, and was rewarded with a 32.5% increase in the shares, compared to the 2.1% loss for the S&P 500. The share gains cut Apple’s 3.9% free cash flow yield down to 2.9%, so it isn’t the value it was then.

Still, the cash flow rose 250% from the prior year, and Apple’s market share remains small for most of its product lines. The company continues to make desirable products, and if I have to take a chance on a tech name surviving an economic downturn it might as well be Apple.

Adobe

My last September stock pick was a bullish call on Adobe (ADBE) on the 18th. The stock always seems to sell off after a major product introduction such as the Creative Suite launch in May of this year. Investors tend to sell on that news after buying up the shares in anticipation of it.

Although the sell-off wasn’t very pronounced this year, the shares did get stuck in neutral. My own call may have been a bit early, as the shares are down 6.3% since the article and the S&P is only down 4.9%.

On their earnings call, the company reiterated their guidance for next year. As the next product cycle moves closer, I think my bullishness will pay off.

Disclosure: William Trent owns shares of Adobe (ADBE) and has written naked put options against the shares of Office Depot (ODP).

William Trent currently has a short position in put options related to Office Depot (ODP).

Topics: Adobe Systems (ADBE), Advertising, Airline, Apple (AAPL), Communications Equipment, Computer Hardware, Delta Air Lines (DAL), Motorola (MOT), Office Depot (ODP), Retail (Specialty), Services, Technology, Transportation, Yahoo! (YHOO) | No Comments

YHOO: Not Shouting Yahoo! Over Yahoo!

This article was originally posted at RealMoney on Sept. 11, 2007.

As I noted in my Motorola column, I like to take a look at the stocks with unusual option activity on StockPickr to see if there is anything sufficiently interesting to investigate further. Friday’s list was a doozy, with heavy activity listed for deep out-of-the-money October calls for Motorola (MOT - Annual Report), Arch Coal (ACI) and Yahoo! (YHOO). Having found a possible long-term bargain in Motorola I turned my attention to Yahoo! to see if I could pull a two-fer. Alas, it looks as though I may have bagged my limit.

Unlike Motorola, Yahoo! has no chance at a bloodletting fire-the-CEO rally (justified or not) because it has already happened. Instead, any hopes for a short-term pop in Yahoo! shares are probably underpinned by the persistent buyout rumors, with Microsoft (MSFT - Annual Report) and EBay (EBAY) being the buyers most frequently bandied about. But the problem with those rumors is they have been around forever, and so far smoke has yet to signal fire. Anybody buying the name in hopes of a buyout should therefore be prepared (and paid) to wait.

So, will Yahoo! reward a patient approach? It doesn’t look that way to me. Its free cash flow in 2006 was $700 million, half the level achieved in 2005. It is only good for a 2.3% free cash flow yield on the current enterprise value. That means essentially all of the return potential has to come from growth – which doesn’t seem like a safe bet given last year’s decline. Sure, the growth rate over the last five years is nearly 45% – but that is coming off of the lowest lows of the Internut Bust. The consensus five-year growth estimate is 24%, including a 20% decline in the current year. By implication, that means the subsequent four years would have to post average growth of nearly 40% annually. Color me skeptical. With an ROE of just 8.27%, assuming growth will be faster than that implies adding debt or issuing new shares unless they can somehow boost the ROE itself – a feat far easier said than done. Coincidentally (or not) that is about in line with the actual year/year growth rate in the latest quarter.

I know, I know – that’s all just academic theory. So let’s consider Yahoo’s businesses to get a feel for what the company can do to boost that ROE and ramp up the earnings growth. According to the latest 10Q, fee-based businesses such as premium mail, web hosting and premium Flickr accounts contribute just 12% of revenue. While they may grow, it is hard to imagine them growing enough to move the needle. That leaves “marketing services” such as HotJobs and display advertising. Somehow, the latest employment report leaves me less than fired up about HotJobs’ prospects. As for display advertising, financial services firms have accounted for anywhere from 12% to 30% of online advertising. A good chunk of that is mortgage refinancing and credit cards – both of which seem likely to suffer as credit standards return to historic norms.

Yahoo! is a great company, with a balance sheet strong enough to carry them through any downturn in the online advertising market. But they aren’t generating enough cash flow today to make waiting for the recovery worthwhile – at least not for me. There are other companies out there that look like safer bets. While Yahoo! could very well return to growth, it just looks too hard to earn a return high enough to compensate for the risk.

Topics: Advertising, E-Bay (EBAY), Microsoft (MSFT), Motorola (MOT), Retail (Specialty), Yahoo! (YHOO) | 3 Comments

MOT: Motorola’s Cash Flow Backstop Confers Confidence

The following article was previously published at RealMoney on Sept. 10, 2007.

Though I consider myself a longer-term investor, I like to take a look at the stocks with unusual option activity on StockPickr to see if there is anything sufficiently interesting to investigate further. Friday’s list was a doozy, with heavy activity listed for deep out-of-the-money October calls for Motorola (MOT - Annual Report), Arch Coal (ACI) and Yahoo! (YHOO). I dug a little deeper on Motorola, and came away thinking it might be worthwhile even for those willing to wait longer than October to see a return.

Motorola was having an investor day on Friday, though it is hard to imagine anyone thinking it would produce an announcement worthy of a 20% up move. In fact, there probably is only one such possible announcement, and that is of Ed Zander’s resignation. The company has struggled to find a follow-up that matches the RAZR’s success, let alone one-ups it. In Zander’s own words, “In Mobile Devices, we did not achieve the level of sales and unit shipments that we had expected, primarily in Asia and the Middle East and Africa. Europe, as we have been saying all year, continues to be a challenge.” The message boards are downright gruesome.

But if all it takes for a 20% up-move in Motorola is a new CEO, the market has gotten awful forgetful. After all, it was just four short years ago that the stock rallied 10% (from a far lower base) on the news that Chris Galvin was resigning to be replaced by Zander. It makes one wonder why they keep them as long as they do – if I could get a 10% rally on every CEO firing, I wish Motorola would do it at least once a year. Zander is credited with putting the RAZR on the fast-track and for… not much else. Why settle for anyone’s second-best idea? Give them a few months to put their best one into action, then sayonara! It’s time to find someone else, with a new best idea. Call it crowd-sourcing for CEOs.

So in case you missed the sarcasm, color me skeptical that Zander’s departure would do much for Motorola over the long term. And don’t tell me they need “compelling products” when Nokia (NOK) consistently produces the blandest, clunkiest, ugliest, bulkiest – and best-selling – phones on the market. The analyst day highlighted a return to cash generation – which will definitely be needed for a turnaround to succeed, regardless of who is behind it.

Motorola generated cash flow from operating activity of $3 billion in 2004, $4.6 billion in RAZR-backed 2005 and $3.5 billion last year. For the last 12 months, however, they are down to $2.2 billion – of which $700 million was used up in capex. Still, in a somewhat depressed year it is enough to make the free cash flow yield on Motorola’s $35.6 billion enterprise value comparable with the current treasury yield. All Motorola needs to do is get cash flow back to 2004 levels and today’s investors will be compensated for accepting the risk. If they can get to 2004 free cash flow levels and grow the cash flow a measly 2% per year from there I estimate the stock would be worth nearly $23 – more than 25% above the current price. They could pretty much do that just by trimming R&D expense to the 2004 level (which was all they needed to produce the previous hit product anyway.) This scenario doesn’t require them to create the next RAZR, but if they did it would make for a nice icing on the cake.

The obvious risk to this thesis is that cash flow could move in the wrong direction. It isn’t hard to imagine possible scenarios where this happens, especially given the lukewarm reaction the street is giving the recent comments on cash flow improvement. It wouldn’t be the first time a management team gave up on a promising strategy in order to give investors what they thought they wanted. If you are a buyer on the cash flow story you’ll probably want to flee for the exits if anything is announced that will eat up the cash. Fortunately, however, Icahn is nipping at Motorola’s heels. That might be enough to keep them from doing anything too rash.

Topics: Advertising, Communications Equipment, Motorola (MOT), Nokia (NOK), Services, Yahoo! (YHOO) | No Comments

All Over But the Yodeling: Comparing Conference Calls for Yahoo and Google

Google’s results solved the mystery over the whereabouts of Yahoo’s revenues. With twice the revenue base growing nine times as quickly, there just isn’t much of a competition going on. The differences come through loud and clear when one compares the conference calls.

Eric Schmidt

Well, thank you very much, Kim. As everybody can see from the press release, we are ecstatic about our financial results this past quarter. Before I start talking about how well we did this quarter, I would like to remind everybody as I have each year at this time, that we are about to enter our seasonally slower summer growth period, and make sure you factor that in when thinking about how our business will grow.

(Excerpt from full GOOG conference call transcript)

Googlers have reason to be exstatic, and Schmidt’s attempt to rein in analyst enthusiasm (to keep the estimates low enough to be blown away again next quarter) does nothing to dampen it.

Terry Semel

Good afternoon, everyone. Let me begin by reminding you of our strategy, designed to enable us to capture the future growth of the Internet.

(Excerpt from full YHOO conference call transcript)

‘Cause Lord knows they aren’t capturing its present growth.

Sometimes I worry that we spend so much time talking about all the new things that we don’t focus as much on the core business, especially in our marketing and messaging.

Excerpt from full GOOG conference call transcript)

That worrying about focus will most likely mean they never have to say:

Over the past six months, we have made clear our intention to sharpen Yahoo!’s focus on our key customer segments and our strategic priorities.

(Excerpt from full YHOO conference call transcript)

Both companies talked extensively about growth opportunities. Yahoo talked up Panama, while Google discussed the acquisition of Doubleclick. But what is clear is that Yahoo’s plans are all about catching up, while Google is looking to cement its lead.

Topics: Google (GOOG), Stock Market, Yahoo! (YHOO) | No Comments

GOOG: Google Solves Mystery Over Whereabouts Of Yahoo’s Revenues

Google Announces First Quarter 2007 Results: Financial News – Yahoo! Finance

Google reported revenues of $3.66 billion for the quarter ended March 31, 2007, an increase of 63% compared to the first quarter of 2006 and an increase of 14% compared to the fourth quarter of 2006. Google reports its revenues, consistent with GAAP, on a gross basis without deducting traffic acquisition costs, or TAC. In the first quarter of 2007, TAC totaled $1.13 billion, or 31% of advertising revenues.

GAAP EPS for the first quarter of 2007 was $3.18 on 315 million diluted shares outstanding, compared to $3.29 for the fourth quarter of 2006 on 313 million diluted shares outstanding. Non-GAAP EPS in the first quarter of 2007 was $3.68, compared to $3.18 in the fourth quarter of 2006.

So that’s where Yahoo’s revenue’s went. As we noted in our earnings preview, consensus expected $3.30 (non-GAAP) on $2.5 billion in revenue (net of TAC) this quarter and $3.41 on $2.63 billion next. Despite being twice Yahoo’s size, Google grew its revenues nine times as fast. The financial statements yielded virtually nothing worth criticizing, so we’re stuck with Google’s practice of not issuing guidance.

Topics: Google (GOOG), Stock Market, Yahoo! (YHOO) | No Comments

YHOO: Hey Yahoo! Where’re the Revenues?

Yahoo! (YHOO) Reported First Quarter 2007 Financial Results and investors didn’t have to read far to find disappointing news.

Revenues were $1,672 million for the first quarter of 2007, a 7 percent increase compared to $1,567 million for the same period of 2006.

Consensus estimates were for $1.21 billion in sales – nearly 25% higher than Yahoo! reported.  There is no way 7% year/year growth can support a 62x trailing P/E multiple. When the stock rallied in October on the imminent release of the new “Panama” search marketing system, we said:

Ultimately it will hinge on whether Panama is truly a better mousetrap. If it is (we’ll know in a couple of quarters) then yes, the worst is probably over. If Panama falls flat, however, things could get much uglier.

Given that the Panama system only really launched on March 30 it is a bit premature to say it has fallen flat. However, comments on the conference call that “we expect that this year our growth will be broadly consistent with the U.S. display market” (i.e. not the search market) suggest it isn’t particularly fizzy either.

Topics: Stock Market, Yahoo! (YHOO) | 2 Comments

The Week Ahead (15 April 2007)

The Economic Calendar shows three potentially important news releases this week:

  • Monday’s retail sales report (Consensus 0.6%, 0.9% less autos)
  • CPI on Tuesday (Consensus 0.2% core, 0.6% headline)
  • Housing Starts on Tuesday (Consensus 1.49 million, SA)

Earnings season is quite active this week as well.

Tuesday

  • IBM (IBM - Annual Report) – Consensus expects $1.21 on $21.86 billion in revenue and next-quarter guidance of $1.46 on $23.04 billion. Given that these numbers represent sales growth of 5.8% and 5.2%, respectively, it would be a near-disaster if they miss.
  • Intel (INTC - Annual Report) – Consensus wants $0.22 on $9 billion this quarter and $0.22 on $8.9 billion next. We think that next quarter sales figure, which represents 10.8% year/year growth, is too optimistic.
  • Linear Technology (LLTC) – Consensus wants $0.32 on $254 million this quarter and $0.34 on $263 million next.
  • Yahoo! (YHOO) – Consensus expects $0.11 on $1.21 billion this quarter and $0.13 on 1.28 billion next.

Wednesday

  • Motorola (MOT - Annual Report) – Consensus expects $0.02 on $9.3 billion this quarter and $0.08 on $10 billion next. They already preannounced, so the guidance is the important bit. Numbers have come down dramatically but may have further yet to go.

Thursday

  • Armor Holdings (AH) – Consensus wants $1.11 on $841 million this quarter and $0.92 on $775 next. There may well be a guidance beat since the numbers expect a significant growth slowdown year/year.
  • Advanced Micro Devices (AMD - Annual Report) – Expected to lose $0.46 on $1.34 billion in sales this quarter and $0.36 on $1.35 billion next. Given how disastrous the current outlook is, we may be getting near the bottom for estimates. Valuation, however, remains questionable. We hate negative P/E multiples.
  • Google (GOOG - Annual Report) – Consensus expects $3.30 on $2.5 billion in revenue this quarter and $3.41 on $2.63 billion next. The Double-click acquisition may help next quarter. Without it, the estimates seem more realistic (less room for upside surprise) than they have been recently.
  • Landstar (LSTR - Annual Report) – Consensus expects $0.40 on $590 million this quarter and $0.54 on $656 million next. We think they will beat.
  • Nokia (NOK) – Consensus expects $0.32 on $13.1 billion this quarter, $0.34 on $13.9 billion next. We take the under.

Friday

  • SAP (SAP - Annual Report) – Consensus expects $0.36 on $2.93 billion this quarter and $0.44 on $3.17 billion next. Both seem on the high side.
  • Xerox (XRX)  – Consensus expects $0.20 on $3.82 billion this quarter and $0.27 on $4.09 next. The estimates have come down but are at the high end of revised guidance.
Topics: AH, Advanced Micro Devices (AMD), Google (GOOG), IBM, Intel (INTC), Linear Technology (LLTC), Motorola (MOT), Nokia (NOK), SAP (SAP), Stock Market, Xerox (XRX), Yahoo! (YHOO) | 5 Comments