Sun Shines on Yahoo!

An upgrade sends the hard-hit stock higher.
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Yahoo!

(YHOO)

fans finally got something to yodel about Thursday.

UBS analyst Benjamin Schachter

upgraded the stock to buy from neutral, sending Yahoo!'s hard-hit shares up 3% in heavy trading. Schachter says the stock's 22% slump this year going into Thursday's action has made it cheaper than rival

Google

(GOOG) - Get Report

.

"The bottom line is that, despite some longer-term issues, we think weak industry sentiment combined with some valid company-specific concerns have pushed the stock lower than is justified," writes Schachter. "We believe that the near-term positives outweigh the near-term risks."

The brokerage set a price target on Yahoo! of $39, which represents an enterprise value of 20 times UBS's estimate of 2007 earnings before interest, taxes depreciation and amortization. Schachter expects that the company will benefit from the continued shift of advertising dollars online and the improvements it is making to its search engine.

Yahoo!, which has now been upgraded by three analysts since January, rose $1.03 to $31.78.

Schachter has high hopes for the first quarter ending next week. He says Yahoo! has beaten its first-quarter earnings estimates and raised guidance for the past three years, a trend that Schachter expects to continue.

"Various industry contacts have indicated that advertising campaigns are being planned and purchased earlier on in the year," he writes. "Additionally, while search has received attention over the past year, we continue to point out that it is difficult to spend very large sums on search. ... Yahoo! offers many non-search advertising options to the advertisers that still want to spend online."

UBS has provided noninvestment banking services to Yahoo! in the past 12 months and makes a market in Yahoo!'s shares.

Investors continue to have lingering concerns about Yahoo!, such as its loss of market share in search to Google. Then there is the continual confusion about its plans to develop original content and disappointing growth in international markets, Schachter writes.

Schachter is maintaining his neutral rating on Google. UBS has provided investment banking services to Google within the past 12 months. Google shares rose 96 cents to $341.18.

"We currently have lower confidence in our and the Street's collective ability to accurately estimate revenue, and that we tend to think that the consensus operating expense estimates remain low," he writes.