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An investment firm specializing in macro economic trends through a top down analysis of companies. We look for market discrepancies and strong cash flow to fortify our intuition and establish positions at favorable pricing. We will begin testing a new portfolio strategy which will include a... More
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  • Interesting Valuation Of Yahoo, 12 Mo PT $50 Per Share, Or 46% Upside 2 comments
    Apr 7, 2014 12:14 PM

    It is a sunday morning in Bei Jing, and having glanced at the recent drop in Yahoo's price, I believe it merited an evaluation and recommendation as to where the company will be heading in the future.

    Bloomberg values Alibaba at $160B which values Yahoo's position in it at $38.4B. It is my understanding that Yahoo will sell a portion (say 12%) of its shares in the IPO so lets consider the after-tax cash flow of (19.2*.65) $12.48B. That makes the position worth about $31.68B.

    At today's current market cap, Yahoo is valued at $34.58B, this is only a difference of $2.9B….BUT WAIT!! This means that Yahoos core business and its 35% position in Yahoo Japan (worth $9.94B) is actually only worth $2.9B.

    Lets run a numbers check: $31.68B from Alibaba after tax + $9.94B from Yahoo Japan= $41.62B, or per share price of $41.02. Current market price of $34.26 is a 19.7% discount to the market value of its holdings.

    But wait, theres more!

    Lets not forget that Yahoo has its own operations to include in the price.

    Albeit that recently the trends for the company haven't been looking good (Loss in Market share from 3.37% to 2.87% YOY)

    Yahoo's cash flow from operating activities the last 4 quarters is the following (In 000′s):

    Total Cash Flow From Operating Activities 347,727 298,010 330,828 218,682

    Lets look at the company now:

    Over a billion in cash flow for investment/financing decisions (has been purchasing back stock with a portion of it)

    Its EBITD margin is at 25% and Net profit margin is at 10% which signifies that the company is profitable.

    Spent $1B on R&D last year alone

    Quarterly EARNINGS of $150M on average from operating income

    Annual depreciation expense (not a cash outflow) of $650M

    About $1.2B in FCF

    Growth estimation of next 5 years at 7.25% (Yahoo finance)

    CAPM: 3.4% + 1.05( 10%-3.4%)= 10.33%

    FCF= Operating CF - capex

    FCF= 1.2B - .338B= $862M

    Although our CAPM says discount rate is 10.33% I want to be conservative and say it is 16% and growth rate is 3%, not 7.25% (from yahoo finance)

    $862M/ 10.33-7.25= $27.9B valuation of Yahoo's operations, unrealistic so disregard

    My conservative assumptions:

    $862M/16.00%-3.00%= $6.6B valuation of Yahoo's core business, but remember that yahoo spent $1B on R&D on research last year alone and about $900M in each year 2012 and 2011.

    Again, being conservative we will not include the almost $3B spent on R&D into our valuation

    $31.68B from Alibaba after tax + $9.94B from Yahoo Japan= $41.62B + $6.6B valuation of core operations= $48.22B

    Or $47.74 per share, a 39.3% difference from current prices.

    There are risks in this investment:

    Specifically China's growing credit bubble, uncertain growth prospects of Yahoo, Alibaba's IPO price, and others.

    The pros here:

    China will begin to shift towards service oriented economy as manufacturing jobs are being outsourced to Vietnam, Thailand and other lower cost countries

    Alibaba's business model is EXTREMELY profitable and is growing extremely fast (40% or more on margin and growth) and may induce higher valuation, which would only benefit Yahoo

    It has 80% of Chinas e-commerce market, but will be well equipped to enter new markets with all the digital infrastructure and business model in place

    To Summarize:

    Absolute Worst case scenario 12 month Price target:

    Yahoo $38 per share (Alibaba valued at $120B, Yahoo's core valued at $4B (essentially worth what it spent on R&D last 4 years) and Yahoo Japan goes down almost 50% in a year)

    Average Scenario 12 month Price target:

    Yahoo $46-49 per share (Alibaba valued at $145B, Yahoo's core valued at $5.5B, Yahoo Japan stake stays at current value of $10B)

    Above average scenario 12 month price target:

    Yahoo $49-53 per share Alibaba valued at $160, Yahoo's core valued at $8.5B, Yahoo Japan stake worth $11B)

    BEST case scenario:

    Yahoo $58-62 per share Alibaba valued at $180B, core valued at $10B, Yhoo Japan worth $12B)

    The most realistic scenario in my opinion is the Above Average scenario putting Yahoo's shares at $50, or a 46% upside from current prices. We are not including the value of Yahoo's R&D in these Price Targets.

    Disclaimer: I have positions in $YHOO, this post is my thoughts and opinions, not an investment recommendation. Do your own due diligence when considering investing.

    Disclosure: I am long YHOO.

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Comments (2)
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  • jpgulli
    , contributor
    Comments (5) | Send Message
    Didn't you leave out the $5 billion in cash on Yahoo's balance sheet?
    8 Apr 2014, 03:28 PM Reply Like
  • Borgert Brothers
    , contributor
    Comments (2) | Send Message
    Author’s reply » You are right, and I did not correctly calculate the value of its entire stake of Alibaba (should be entirely reduced by 35% as opposed to only the portion being sold in the market to get FMV). That makes it a more compelling story. It will be interesting to see what Yahoo reports on their quarter today. Thanks for pointing out my error.
    15 Apr 2014, 03:35 AM Reply Like
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