On Monday, February 25th, Yahoo (YHOO) announced it will no longer let its employees telecommute. Do we care? The market seemed to endorse the decision by giving a 2% gain on the share price, but it's unclear if that was an endorsement or if Yahoo is just a good gaining stock right now. As of the writing of this article on Friday, March 1st, Yahoo stock has already gained another 2% and without any news regarding worker policy.
The company seems to be making a substantial turnaround. A brief look at the financials shows a 79% increase in profit margin last year, accompanied with a huge jump in EPS from $0.82 in 2011 to $3.28 in 2012. In addition, they've been buying back shares over the last few years, which increases equity and makes the EPS go up; and when the EPS goes up, the price is sure to follow.
They're also #2 in a very small market. Google (NASDAQ:GOOG) is obviously the alpha pup in the query market, but they are carrying debt and have a return on assets of around 13%. Yahoo, on the hand, has $0.00 in debt and a ROA above 20%. That means that for each dollar Yahoo invests in itself, it should earn $0.07 more than each dollar Google invests in itself. This should also boost EPS in the long run, as long as they retain earnings and apply them to growth. Also, Google stock has been doing fairly well lately and is proudly sporting a rotund P/E above 24. Yahoo stock has been struggling and is undervalued with a wiry P/E above 6.
Traditionally, Yahoo has been underperforming relative to its fundamental indicators. For years it was selling with a bloated P/E in the high double digits. Even in 2009, when the company was bleeding out with earnings at $0.42 per share, an ROA of 4%, poor management, an increase in outstanding shares and an increase in debt, the P/E was above 35 on average. The real kicker is that the company has been behaving non-rationally in terms of management and finances since its inception. Is this just another twist in Yahoo's tumultuous tale?
The company has been making real strides to turn itself around. The writing was on the wall back in 2011 when Mircosoft (NASDAQ:MSFT) was attempting to buy them out. Since then, they've cycled through some CEOs and other acronyms, but they've also settled on some substantial changes in significant management and financial policies not related to worker locale. These changes will be ones that will carry the company forward and keep it prosperous and profitable, provided they keep hiring management that abide by them, keep buying back stock, keep their margins up, keep debt at zero, keep their ROA above 20%, keep retaining earnings and apply them to growth, and keep trying to be better than themselves, not better than Google. If they can do this, then being #2 will be very profitable for their investors who get in when the P/E is less than 10.
Disclosure: I am long YHOO, GOOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.