Event: YHOO ($15.67) report Q4 after the close tonight
-Options market is implying about a 4% move vs the 4 qtr average move of about 4.5%
Consensus Expectations:
Q4: .24 eps, $1.19b in sales
Q1: .20 eps, $1.08b in sales
2012: .91 eps, $4.547 in sales
-YHOO will be hosting their first earnings call since the appointment of new CEO Scott Thompson. It is just common sense that after just a few weeks on the job, Thompson will not go out on a limb and give overly aggressive guidance as he sets his sites on succeeding in a post that has seen very few do so over the last decade.
–GOOG‘s earnings disappointment late last week doesn’t exactly raise the bar for YHOO’s Q4.
Sentiment: Wall Street analysts are fairly mixed on the name with 10 Buys, 20 Holds and 1 Sell and avg 12 month price target of about $17.82. Short interest is about 3.25% of the float.
Balance Sheet and Valaution:
-YHOO has about $2.8b in cash and no debt, about $2.25 a share.
-I guess the real reason many bulls suggest owning YHOO shares is that the sum of the parts, including $2.25 in cash per share and estimates of Alibaba and YHOO Japan worth about $11-$14 (per BofA note to clients Jan 20th) leaves the value for YHOO’s core business at just $5.00 a share.
-BofA analyst Justin Post sees valuation at current levels reasonable give the potential for a sale of their Asian assets, in a not to clients Jan 20th:
We believe the underlying trends at Yahoo (share losses) remain weak, but the
core business represents just 20% of the stock value and the stock will continue
to trade on deal speculation. Our $18 PO is based on $13 in asset value and low
4x multiple to 2012E EBITDA (to reflect display/search uncertainties). We see a
potential Asian asset sale as the most positive likely case for the stock, and don’t
see huge downside despite a struggling core business given $13+ in asset value.
Technicals and Price Action:
-Stock has flat-lined btwn ~$15 and $16.25 for the last couple months that have included management changes and lots of chatter about strategic asset sales.
-Stock continues to straddle the 200 day moving average and is making a decent looking base that could be a launching pad on the news of a tax effective asset sale. The stock is mildly in the doghouse so far this year down about 2.8% vs the Nasdaq that is up almost 7%.
[caption id="attachment_8235" align="aligncenter" width="300" caption="1 YR YHOO chart from Bloomberg LP"]
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MY TAKE: while expectations aren’t exactly running high heading into the print, my sense that fading an upside move in the near-term and setting up for a rally into the spring, as the new CEO gets his arms around the business and prepared to make a decision on Alibaba/YHOO Japan. This could take a couple months, and the truth is If I were Thompson I would want to get the deal done relatively soon, get investors off my back and look to better position a well capitalized, leaner more focused company (that faces significant competition from GOOG and Facebook to name a few) for the next 10 years.
MY TRADE:
YHOO ($15.67) Bought Feb / Apr 17 Call Spread for .45
-Sold 1 Feb 17 Call at .15
-Bought 1 Apr 17 Call for .60
Break-Even on Feb Expiration:
-If the stock is below $17, the Feb 17s that I am short will expire worthless, and then I essentially own the Apr 17 calls for .45
-Max loss is .45 if the stock is meaningfully above $17, but the likelihood of being down much on an initial pop in the stock is not great.
Trade Rationale: I want to look to buy some upside exposure in anticipation that a deal to sell YHOO”s Asian assets gets announced in the next couple months. I think it would be almost impossible for the new CEO to do this in the next few weeks as he has only been on the job for a couple of weeks.
I also think there is a good chance that the new CEO kitchen sinks Q1 and possibly 2012 as he sets himself up to have a string of beat and raise quarters out of the gate. If I were him I would do what previous CEO Carol Bartz did when she took over a few years back and blame everything on the previous management and start anew.
The only reason you want to own YHOO Is that you think the core business is vastly under-appreciated and that once that can be valued as a standalone that investors will better appreciate them or possibly a strategic buyer.
I am selling Feb options as I think that lack of clarity in the near term could keep the stock in the trading range that it has been in.