Past Performance: Yahoo (NASDAQ:YHOO) has not missed EPS expectations once in the past four years, quite an impressive feat for a company that recently changed its CEO. In the past four first quarters, Yahoo has beaten EPS expectations by an average of 45.45%. Just last year, Yahoo beat expectations by 39.5%. In the past four years, however, Yahoo has never reported EPS of $0.25 in the first quarter which is what the street is expecting.
Yahoo has recovered nicely since hitting a 52-week low of $14.59 back on August 30th last year. Yahoo hit a 52-week high back on March 5th of $23.08. Yahoo has tested that level and shown signs of having difficulty breaking through that price, giving us a resistance point. Yahoo is beginning to pull back from overbought levels on the technical side, and should find support around the $21.00 point.
Fundamentals: Yahoo trades with a current P/E of 6.81, a forward P/E of 18.44, a P/S of 4.90, and a PEG ratio of 1.53. Currently, the technology sector as a whole trades with a P/E of 22.1 and a forward P/E of 13.2. The S&P 500 trades with a current P/E of 20.6 and a forward P/E of 17.3. By comparing the current P/E of all three, Yahoo looks to be undervalued currently. The use of future metrics shows a much different picture.
Yahoo's forward P/E of 18.44 is higher than both the technology sector and the S&P 500 average. A P/S of 4.90 should be enough to illustrate just how overbought YHOO is in and of itself. The PEG of 1.53 shows the price appreciation of the stock is outpacing growth of earnings. The fundamentals simply don't support Yahoo at its current price.
The Story: CEO Marissa Mayer, formerly of Google (NASDAQ:GOOG), has been shaking things up in her short stint with Yahoo. She recently banned telecommuting at Yahoo which Ms. Mayer has received quite a bit of heat on. While Marissa Mayer is facing heat, she has her focus pinpointed on productivity at Yahoo. She is attempting to turn the company around, and initiate more revenue generating products as the rumored majority stake in Dailymotion illustrates.
The balance sheet has pretty decent fundamentals, but definitely needs some help. Deferred long-term liability charges have increased nearly 100% in the past three years. Deferred long-term liability charges have increased so much that they now cost Yahoo only 20% less than the total of current liabilities. Three years ago, deferred long-term liability charges only cost Yahoo roughly 36% when compared to total current liabilities. It will take a substantial amount of work to fix these balance sheet issues, as well as the business plan in general as Yahoo continues to lose the market share battle in search.
How To Play It: A beat on first quarter earnings could provide a short opportunity for investors who enjoy playing the downside. The technicals point to a slight overvalued stock price, while the fundamentals clearly show a pull back is in order as Yahoo continues their turnaround. From a short term perspective, this is a terrific short play. If you're a long term investor, I would buy on a pullback that breaks the stock down past $20 per share. My personal 52-week price target: $26.18.
Additional disclosure: Always consult with your own registered financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.