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Justin Post, an analyst at Merrill Lynch, today upgraded his rating on Yahoo (YHOO) to Buy from Neutral, seeing significant opportunity for the company to increase monetization of its search queries.

“Down 35% [year-to-date], Yahoo is at an attractive entry point entering a seasonally strong holiday period and in-front of a two-year search monetization upgrade cycle, in our view,” he wrote in a note this morning. “Two weeks ago, Yahoo formally launched new search campaign management tools and, while monetization improvements won’t meaningfully kick in until [the second half of 2007], we think Q4 estimates are washed out and 2007 buyside expectations are likely lower than sell-side forecasts.”

Post says Yahoo has “many, now seemingly underappreciated assets,” including the largest global user base, 24% year-over-year page view growth in Q3, the No. 2 video streaming site and the No. 2 position in search.

As for the takeover chatter, Post says he thinks Yahoo’s assets “would be compelling for Microsoft (MSFT) or a large media conglomerate looking to build a meaningful online presence.” He’s thought that for a while now: Post analyzed the potential for a combination of the two companies in a report back in June.

Post set a price target on the stock today of $32. Yahoo shares today have gained 89 cents to $26.23.

Source: Merrill: Yahoo Assets Could Be Attractive to Microsoft