All Eyes on Yahoo Buyout, Not Earnings

BOSTON ( TheStreet) -- Yahoo ( YHOO) reports third-quarter financial results after the close of trading today, though investors won't be focused on earnings or revenue. Instead, they'll be looking for clues about the potential sale of the company.

Over the past few weeks, there have been rumors of a potential tie-up with AOL, a buyout from Microsoft and even a takeover by co-founder Jerry Yang. The news that really propped up the shares was a comment from Alibaba CEO Jack Ma saying he's extremely interested in buying out Yahoo.

Yahoo, which owns a 40% stake in the Alibaba Group, should be worth nearly $17 to $22 per share in a takeout, according to Bank of America-Merrill Lynch analyst Justin Post. He says Yahoo's assets alone are worth at least $12 a share, with most of the value coming from the Alibaba Group stake, estimated to be worth $32 billion. Based on Post's analysis, Yahoo's core business represents just 20% of the stock value.

The key asset in the group is Alibaba's subsidiary company Taobao, the leading e-commerce company in China, and conservatively estimated by Post to be worth $25 billion (or $5/share). Yahoo Japan (of which Yahoo owns a 35% stake) is likely to be sold off soon, and estimated to be worth nearly $20 billion (or $3.30/share).

Add in nearly $2 per share in cash, and it's no surprise that investors have bid up the stock (up 16% since Oct. 1), hoping a potential suitor will unlock the true value of the company.

Post's estimates seem to be in line with many of the big hedge funds.

Hedge fund manager Dan Loeb of Third Point said in a letter to Yahoo's board in September that he was "convinced that Yahoo is grossly undervalued." In his letter, he goes on to provide a breakdown of his analysis, saying the core business for Yahoo was being valued at an implied $2.78 per share, or 2.2 times 2012 EBITDA.

"With more effective and focused management, one could realistically envision a re-rating to at least 7 times 2012 EBITDA, driving a target of over $19 per share," Loeb says.

While the company is expected to report $1.07 billion in revenue and $0.17 in EPS for the third quarter, guidance from management will be crucial to today's call. Investors need to see further signs that there are actions under way to either unlock value (namely, the sale of Yahoo Japan) or continued strategic developments that indicate that a sale of the company is likely.
Equity research manager Chris Stuart, CFA, joined TheStreet Ratings after working as a senior investment analyst with Merrill Lynch covering small-cap equity and alternative investment strategies. Prior to that, Stuart worked for One Beacon Insurance as an actuarial analyst and at H&R Block as a financial adviser.

Stuart earned his bachelor's degree in finance from the University of Massachusetts, Amherst. He holds a Chartered Financial Analyst (CFA) designation and is a member of the Boston Security Analysts Society (BSAS) and the CFA Institute.

If you liked this article you might like

Mellanox Must Hike 2018 Targets or Face Activist Escalation, M&A

Mellanox Must Hike 2018 Targets or Face Activist Escalation, M&A

Amazon's Taxes, Yahoo! Breach, PepsiCo Earnings: Wednesday's Top Stories

Amazon's Taxes, Yahoo! Breach, PepsiCo Earnings: Wednesday's Top Stories

Equifax Breach Reveals Frightening Truth: Companies Can Delay Disclosing Hacks

Equifax Breach Reveals Frightening Truth: Companies Can Delay Disclosing Hacks

How Alibaba's 'Genie' Smart Speaker Can Overcome the Amazon Echo's 3-Year Head Start and Still Win

How Alibaba's 'Genie' Smart Speaker Can Overcome the Amazon Echo's 3-Year Head Start and Still Win

Facebook, Apple, Netflix and Google Have Caught the Flu -- Here's How Not to Get Killed By It

Facebook, Apple, Netflix and Google Have Caught the Flu -- Here's How Not to Get Killed By It