shares look reasonably priced even if the company manages to beat fourth-quarter earnings estimates, Merrill Lynch said in downgrading the stock to neutral from buy Wednesday.
The brokerage said Yahoo!, which closed at $42.98 Tuesday, is approaching its fair value estimate of $46 to $48 a share after nearly doubling since the start of last year. The current price is 73 times the 2005 Thomson First Call earnings estimate of 73 cents a share and 56 times the 2006 estimate of 76 cents a share.
The Yahoo! downgrade came in a mostly bullish report on the online advertising sector in which Merrill raised its 2006 earnings estimate on both
For Yahoo!, Merrill said, 2006 growth should benefit from better search monetization, solid branded advertising and more subscribers. But it said the stock's current high multiple envisions a roughly 20% outperformance of existing estimates, something that might be hard to pull off.
"Since Yahoo! only revised its estimates by approximately 5%-10% in 2005, a 20% revision is unlikely, in our view, unless the company's search monetization is
greater than expected and other initiatives are also ramping faster than expected," Merrill said. "Even if we make more aggressive valuation assumptions where Yahoo! will see 30% growth over the next five years and a higher price to earnings growth multiple of 2 (a premium above Google of 1.5 and the average of the other Internet names) for higher visibility and a more disciplined management, we arrive at most $46-$49 a share for a 10% revision in estimates."
The shares fell 77 cents, or 1.8%, to $42.21 on Instinet.