I am in the process of having a little Twitter Conversation with Eric Jackson of Iron Fire Capital, he is a smart guy, who has been an activist involved in YHOO for years. He alerted me to the fact that Goldman Sachs re-initiated YHOO with a Buy and a 12 month price target of $22.
From GS analyst Heath Terry’s note to clients this am:
Yahoo has been added to the Buy list with a 12-month, $22 price target. We believe the value of Yahoo’s balance sheet assets and the core business are worth more than the current stock price and that capital allocation actions over the coming months will serve as the catalyst to drive that revaluation. While we have long been more negative on Yahoo’s prospects, the uncertainty of the Alibaba stake’s value has been reduced, the company has a new CEO, and the Yahoo Japan stake has appreciated by 30% since May 21, creating a much more attractive risk/reward scenario.
Catalyst: “Some” of the Parts. With $5.80/share in cash, $4.00/share in Yahoo Japan (after tax), and $5.00/share remaining in Alibaba ownership, Yahoo core and the $0.83 in GAAP EPS we expect in 2013, represents $1.30/share. The return of 85% of the initial monetization, $3.00/share should serve as a catalyst for shareholders to realize the value of the parts.
Valuation: Our $22 target on YHOO values the balance sheet assets at $10.6 bn or $14.79/share and Yahoo at $7.17/share or 6X 2013E EV/EBITDA, in line with other ex- or slower growth companies like AOL (5.0X), WebMD (8.2X), Orbitz (4.2X), comScore (11.2X), and Expedia (9.0X).
MY VIEW: While this is not a name I have given a lot of thought of late, Eric’s thought is that most PM’s have not either….earlier this morning though, someone bought 10k of the Nov 17/18 Call Spreads for .12, great risk reward. On the Vol front, as the realized volatility of YHOO has moved lower, 3 month implied volatility is now near 2 year lows. Here is the chart that tells the story:
The market is pricing in a No Catalyst environment from now until Jan13 expiry. While the market may be right, the risk/reward is very favorable, with the upside obviously skewed to higher volatility between now and Jan13.
MY TRADE: YHOO ($16.07) Bought the Jan13 17.50 calls for .39
Break-Even on Jan13:
Profits above 17.89, losses of up to .39 btwn 17.50 and 17.89 with max loss of .39 below 17.50.
I WILL LOOK TO SPREAD THESE IF AND WHEN THE STOCK MOVES HIGHER. GENERALLY I DON’T LOVE TO GET LONG EXPOSURE ON DAYS LIKE TODAY WHEN STOCK UP ON A SPIKE, BUT I AM GOING TO DO MORE WORK ON THE NAME AND LEG INTO THE POSITION