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Follows Benjamin Graham method, deep value, value, long only
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Executive Summary

  • Yahoo (YHOO) is suitable for the Enterprising Investor, but not the Defensive Investor.
  • The market is implying an earnings growth estimate of 7.38%, below the historically demonstrated growth.
  • The company is undervalued at this time based on the ModernGraham valuation model.
  • Enterprising Investors should feel comfortable proceeding with further research.

Yahoo has seen a resurgence in its stock price lately, and for some that may lead to a conclusion that it is not a "value" play at this time; but value does not have to do with how the stock has performed recently. Rather, value simply occurs when the market price is significantly below the intrinsic value of the company. Whether it is a good time to buy, given Mr. Market's recent tendencies is another matter, one which is beyond the scope of this discussion.

Intelligent Investors focus primarily on fundamental analysis and factual data, in an effort to eliminate risk and speculation. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company's historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Yahoo! Inc. fares in the ModernGraham valuation model.

YHOO Chart

YHOO data by YCharts

Defensive Investor - must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
  2. Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
  3. Earnings Stability - positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record - has paid a dividend for at least 10 straight years - FAIL
  5. Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio - PEmg is less than 20 - FAIL
  7. Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - FAIL

Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
  2. Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
  3. Earnings Stability - positive earnings per share for at least 5 years - PASS
  4. Dividend Record - currently pays a dividend - FAIL
  5. Earnings growth - EPSmg greater than 5 years ago - PASS

Valuation Summary

Key Data:

Recent Price$37.76
MG Value$62.50
MG OpinionUndervalued
Value Based on 3% Growth$23.54
Value Based on 0% Growth$13.80
Market Implied Growth Rate7.38%
NCAV$1.14
PEmg23.26
Current Ratio2.99
PB Ratio3.06

Balance Sheet - 9/30/2013

Current Assets$3,566,200,000
Current Liabilities$1,193,100,000
Total Debt$121,200,000
Total Assets$14,905,700,000
Intangible Assets$5,132,200,000
Total Liabilities$2,411,600,000
Outstanding Shares1,013,060,000

Earnings Per Share

2013$1.31
2012$3.28
2011$0.82
2010$0.90
2009$0.42
2008$0.30
2007$0.47
2006$0.52
2005$1.28
2004$0.58
2003$0.19

Earnings Per Share - ModernGraham

2013$1.62
2012$1.57
2011$0.67
2010$0.57
2009$0.47
2008$0.54

Conclusion:

Yahoo! Inc. is a very attractive company for Enterprising Investors, as it passed all of the investor type's requirements except the dividend payments. The Defensive Investor is not as interested, due to the lack of dividend payments and the high PEmg and PB ratios. Value investors seeking to follow the Enterprising Investor portion of the ModernGraham approach based on Benjamin Graham's methods should feel comfortable proceeding with further research. An example of further research may include a review of ModernGraham's valuation of Microsoft (MSFT) and ModernGraham's valuation of Google (GOOG). From a valuation perspective, Yahoo has grown its EPSmg (normalized earnings) from $0.54 in 2008 to $1.62 for 2013. This is a very strong level of growth that outpaces the market's implied estimate for growth of 7.38%. The ModernGraham valuation model consequently estimates an intrinsic value that is well above the market's current price, and the company would appear to be undervalued.

The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Yahoo! Inc.? Where do you see the company going in the future? Is there a company you like better?

Disclosure: The author did not hold a position in Yahoo! Inc. (YHOO) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Yahoo Inc.