Yahoo: A Value Play For 2012

| About: Yahoo! Inc. (YHOO)

Yahoo! (YHOO) describes itself as "creating deeply personal digital experiences that keep people connected across devices and around the globe. Yahoo!'s unique combination of Science+Ar+Scale connects advertisers to consumer who build businesses." Sounds like sort of a combination on demand viewing/broadcasting/content delivering/platform for transmission/advertising driven medium that anyone who owns a computer or device can use. With the exception of on demand viewing, it is a hybrid transmission platform/content producing company. I think. I mean, I really don't know for sure because Yahoo! won't say exactly. What started as a search engine company has morphed into a content driven platform in many markets that relies on its symbiotic relationships with its partners for content and advertising revenue. There, that's a little easier to understand.

Yahoo!'s common shares trade around $15, and have a 52-week range of $11.09 and $18.84. It has a price earnings multiple of 18:60 and earnings per share of $0.82. The company does not currently pay a dividend. The market capitalization is $18.42 billion. The company has total cash of $2.06 billion and total debt of $41 million. Its book value per share is $10.54. Of the 1.21 billion issued shares 14.35% is held by insiders and 69.7% is owned by institutions, leaving retail investors holding approximately 26%. The number of shares short at March 15, 2012 was 28.4 million or 2.90%.

Yahoo!'s fourth quarter 2011 results showed revenues of $1,324 million down 13% from the same period in 2010. Net earnings were $296 million, down 5% from the fourth quarter 2010. Net earnings per share were unchanged at $0.24. The decrease was attributed to the diminished revenue share from the Search Agreement with Microsoft (MSFT). Income from operations increased 10% from fourth quarter 2010 to $242 million. Yahoo! continued to modernize its platforms in the Americas, Western Europe, Eastern Mediterranean countries, Africa and Asia Pacific regions. It made acquisitions to optimize the platforms abilities to work with large data volumes across many providers and different marketplaces. The company entered into agreements to permit networks for advertising operated by Yahoo!, AOL (AOL) and Microsoft to offer each other's premium advertising display platforms to advertising customers.

In the February 7, 2012 Chairman's Update for Shareholders, Roy Bostock outlined that the board had decided to pursue initiatives to increase shareholder value as the board felt that Yahoo! was not meeting either the board's or shareholders expectations. In the update the Chairman indicated that the board had made progress on the strategic and structural review of the business, the composition of the company's board and its ability to enhance the prospect for the company's success in the future. A new CEO, Scott Thompson was appointed, the board is assessing alternative transactions that would increase shareholder value and has entered into discussions with potential partners. In addition, Yahoo! is looking to restructure its holdings in the Alibaba Group and Yahoo! Japan - not that it can provide any details of these discussions or assure the shareholders that the discussions will lead to anything. In order to get rid of some deadwood and make room for more innovative and forward thinking, two members of the board stepped back from re-election and appointed two highly qualified independent directors from the telecommunications, software engineering, hardware and media worlds. The board continues to look for other well qualified members to build out the board and bring it into the next century. The Chairman stated that the reconfigured board will provide a fresh set of perspectives and a diverse set of skills that will enable the company to move forward even more aggressively. Where the forward that Yahoo! is moving toward remains a mystery.

Yahoo! announced on April 4, 2012 that it is eliminating 2,000 jobs which represents 14% of its work force. This part of the restructuring is all part and parcel of the company's main goals which is to become more nimble and responsive to customer needs and wants as well to get back to its "core purpose of putting the users and advertisers first". The company expects to realize approximately $375 million in annualized savings when the job cuts are completed. It will take an estimated pre-tax cash charge of $125 to $145 million in its second quarter 2012 related to the severance of these employees. Yahoo! stated that it will reveal more of its future direction when it announces its first quarter financials on April 17, 2012.

This decision is being viewed as long overdue and positive by some watcher and unpopular by others who view this as unfortunate but necessary and find it disappointing that the round of cuts occurred before the company has let everyone in on what the strategic plan for the company will be going forward. The news release from Third Point dated April 4, 2012, indicates that there are senior level employees and investors who are fed up with the lack of direction at Yahoo! and are planning to exit the company and the stock which may have a negative impact on the share price. The shares closed up 0.59% on the news at $15.27.

Google's (GOOG) common shares trade around $643, in between a 52-week range of $473.02 and $670.25. It has a price earnings multiple of 21:59, with earnings per share of $29.76. It does not pay a dividend. The market capitalization is $208.94 billion. The company has total cash of $43.33 billion and total debt of $6.21 billion. Its book value per share is $178.97. Of the 325.14 million shares issued, 0.42% are held by insiders, and 81.80% are owned by institutions, leaving retail investors holding approximately 18.8%. The number of shares short as of March 15, 2012 is 3.75 million, or 1.50%.

Google's fourth quarter 2011 results have the company reporting a 25% increase in revenues from the fourth quarter of 2010. Revenue was $10.58 billion for the quarter ended December 31, 2011, without deducting traffic acquisition costs. In the fourth quarter traffic acquisition costs totaled $2.45 billion or 24% of advertising revenues. Operating income in the quarter was $3.51 billion or 33% of revenues, compared with $2.98 billion or 35% of revenues in the same quarter of 2010. Net income in the fourth quarter of 2011 was $2.71 billion compared to $2.54 billion in the fourth quarter of 2010. Earnings per share were $8.22 compared to $7.81 per share in the fourth quarter of 2010. In the fourth quarter 2011, Google owned sites generated $7.29 billion in revenues or 69% of total revenues a 29% increase over the fourth quarter 2010. Revenues from outside the U.S. total 53% of total revenues compared to 52% in the third quarter of 2010. Paid clicks which include ad clicks on Google sites increased 34% in 2011 Q4 over the same period in 2010.

Google describes itself as a global technology leader focused on improving the ways people connect with information. That is a whole lot easier to understand. Apparently, the market understands it well too. The company has a loyal base of institutional investors who are rewarded with Google's revenue and earnings increases. It will announce its first quarter of 2012 on April 12. There is not big anticipation or question about the company's direction or what is going to be doing in the foreseeable future.

Are the layoffs and the mystery surrounding the new direction of the company a bad thing? Not really. The company's cash to debt situation is nothing to be alarmed about. The earnings per share are not negative and the company has the following of many institutional investors. Since the company's shares are trading a little higher than the middle of the price range, and only a small percentage is short, it doesn't appear that the market is too worried about the direction of the company. While it is probably frustrating for the high level employees and investors to not really know the set direction of the company, it is not like the bottom is dropping out or the sky is falling.

Yahoo!'s path is reminiscent of the original television broadcasters that relied on advertisers to pay for the production and broadcast of quality programming. Content production was and still is a capital intensive business that has had to find different avenues for revenue. Television broadcast companies went into other areas such as music production, theme parks, and print media offshoots of content. Yahoo! is branching out from the transmission of information over the internet in several ways to providing entertainment and a platform that connects advertisers with a targeted demographic. Yahoo!'s partnerships with AT&T (NYSE:T) and Verizon (NYSE:VZ), Rogers and British Telecom provides broadband access to Yahoo content. It partners with various content providers for its Yahoo! Sports, Yahoo! Finance, Yahoo! Music, Yahoo! Movies, Yahoo! News.

It is exhausting just writing about all the things this company is doing. It hasn't blown the bank in all these endeavors. Its recent job eliminations seem to be a step in the right direction to minimize the burn and maximize the revenue from the workers who are left. If key investors leave, there is still a ton of value in the broadband, information gathering and tracking usage, platform, IT and IP assets and content. The market isn't worried enough to rush into a massive sell off. It has had three different CEOs in the past four years. Perhaps the new one will find a way to better articulate the business of the company in a way that will get rid of the skepticism about what Yahoo! is up to these days.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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