YHOO Q3 Preview

by Dan October 22, 2012 12:43 pm • Commentary

EVENT:  YHOO reports Q3 earnings after the close tonight.  The options market is implying about a 2.5% move on earnings which is a tad higher than the trailing 4 qtr avg move of about 1.9% and a bit shy of the 8 qtr avg of about 3%.  

SENTIMENT:  Wall Street analysts remain fairly neutral on the stock with 11 Buys, 23 Holds and 1 Sell with an avg 12 month price target of ~ $18.44, or about 16% higher than current levels.  Short interest sits at about 2.7% of the float.

PRICE ACTION/TECHNICALS:  YHOO, down ~2% on the year, massively under-performs the Nasdaq (up ~15% ytd) and GOOG still up 4% on the year.  Sentiment in the web based advertising space went from Bad (FB related) to downright horrible following GOOG’s results last week.

YHOO’s 1 yr chart, coupled with recent management changes and talk of monetizing Asian assets suggests that investors are very much in a wait and see mode.

[caption id="attachment_18372" align="aligncenter" width="490" caption="YHOO 1 YR chart from Bloomberg"][/caption]


What is obvious is that the stock has traded within a fairly wide $2 range of 14.50 and 16.50 (about a 13% range), but spent most of the time btwn $15 and $16 (about a 6.5% range), which is also evident by the bunching of the 50, 100 & 200 day moving averages all at or about $15.50.

The 2 year chart shows the massive wedge the stock is forming from the 2011 lows, with huge resistance at the $16 to $17 area and pretty healthy support around the $15 level which also serves as the uptrend from the 2011 lows.

[caption id="attachment_18373" align="aligncenter" width="490" caption="YHOO 2 YR chart from Bloomberg"][/caption]


VOLATILITY:  YHOO vol is low both from a historical volatility perspective as well as by dollar cheap measurements. The Oct 15.5/16 straddle which catches earnings trades for a dollar cheap 35 cents. Meaning, YHOO would need to move only to 15.15 or 16.35 to break even. November atm implied vol is in the mid 20’s which is near the lows of where it has traded for the past few years. These back months probably won’t even see a vol crush normally associated with a post earnings aftermath as it’s already below its historical averages:

[caption id="attachment_18379" align="aligncenter" width="490" caption="YHOO 30 & 60 Day Realized Vol vs 30 Day ATM Implied Vol from Bloomberg"][/caption]

FUNDAMENTALS/VALUATION: For a company that has had 3 CEOs in 3 years, the stock’s performance has been unusually stable, largely because the U.S. business represents a very small part of their market cap.  YHOO’s core business is likely under the same pressures that FB and GOOG do as they struggle with monetizing the consumer shift towards mobile devices.  Investors are very interested in ex-GOOG exec, and New CEO Mayer’s plan to turn around YHOO’s struggle display advertising business.  Given Mayer’s recent delivery of her first son, and the fact she has only been on the job since July I would suspect that tonight’s call is not the appropriate opportunity for a deep dive.

Aside from the core business, investors, particularly activists want to know what Mayer plans to do with the ~$4 billion (net of cash) YHOO received from selling half of their 40% stake of Alibaba.  The prior management had intimated that this would be returned to shareholders, but when you look at the gap in the first chart from August of this year, that was shareholders reaction to Mayer’s reluctance to part with the cash.

The fact of the matter is, YHOO’s core business is basically valued at zero when u back out existing cash, expected Alibaba cash and their remaining stakes in Alibaba and Yahoo Japan.

UNUSUAL ACTIVITY:  It felt like we mentioned a trade that we kept seeing in the market every day last week, someone was selling the Nov 17 call to buy the the Nov 15/14 Put Spread for a small credit or even money. This traded at least 25k from what I could tell, and was likely a hedge against a long position, aside from that we really haven’t a ton of directional flow in the name.

MY VIEW:  The net of it is this, current fundamentals are probably strained at best, but their sum of the parts looks as good as it has in years and the new CEO is probably the most likely of the last 5 (which includes founder Jerry Yang) to straighten this mess out.  A few weeks back when the stock was  2% higher, I bought some Jan13 17.50 calls for .39 with the hope of spreading to a call spread on any meaningful pop in the stock.  With the calls at .26 I am likely to stay put for the moment, but may look to other ways to express a bullish view on a turnaround of this beleaguered company.  Make no mistake about it, these guys are fairly well screwed in their core business, but there are far smarter people with much deeper pockets than me who made some very large bets that the sum of the parts is worth far more than the current public valuation.

I am not expecting a sharp move lower on a miss like GOOG saw last week, as this story is obviously less about this coming qtr or last, but much more with how the company, led by very new management will position itself in a quickly changing online ad market and how the company will further monetize and return to shareholders the value of their Asian assets.