It’s still early in her tenure but Marissa Mayer, new CEO of Yahoo! Inc. (NASDAQ:YHOO), isn’t doing badly so far. She did come in with high expectations- that this ex-Googler would by sheer force of will transform the Internet portal into a go-to media property- that are probably impossible to meet. However, Yahoo’s stock price could benefit from even marginal improvements that merely require good management rather than “vision.” And to Mayer’s credit, she has (so far) resisted the calls from the financial media to spend big on a company-changing acquisition; such moves get big headlines, but don’t always create shareholder value (and it’s hard to imagine Google Inc (NASDAQ:GOOG), Apple, et al overlooking an attractive acquisition target, or underbidding Yahoo! Inc. for it).
Another plus for Mayer- a small plus- is that the company’s quarterly report was not stunning but at least satisfying. Revenue was about flat in the third quarter compared to the third quarter of 2011, with revenue less traffic acquisition costs coming in at $1.1 billion for the sixth of the last seven quarters (it was $1.2 billion in Q4 2011). Operating income declined, but this was due to restructuring charges. Yahoo! Inc. also continued to repurchase stock, indicating that Mayer sees buybacks as an appropriate use of the company’s cash. The stock reacted to the report by moving up about 5%, and it now trades at 18 times trailing earnings. Wall Street analysts- who may be a bit overexcited at the prospect of a new CEO- expect EPS in 2013 to be 15% higher than this year, bringing the forward P/E down to 14.
Billionaire Dan Loeb’s Third Point had been the largest hedge fund holder of the stock at the end of June according to our database of 13F filings. Loeb, an activist investor, had pushed out Yahoo’s previous CEO in a campaign that had left his fund with 71 million shares of the stock at the end of June (over a third of its 13F portfolio and by far its largest position). See more stocks Third Point owned. Billionaire Ken Griffin’s Citadel Investment Group sold a small number of shares but still reported a position of 5.6 million shares at the end of the quarter (find billionaire Ken Griffin's favorite stocks).
Yahoo’s closest peers are AOL, Inc. (NYSE:AOL) and Google; it can also be compared to Microsoft Corporation (NASDAQ:MSFT) and Web content provider IAC/InterActiveCorp (NASDAQ:IACI). AOL is something of a special case, as it is currently sitting on a surplus of cash after selling a portfolio of patents to Microsoft earlier this year. Because this event has skewed its earnings and its cash on hand, it’s probably more appropriate to look at its EV/EBITDA multiple of 4.6x and keep in mind that at the end of its last quarter it had about $1.5 billion in cash and cash equivalents on its balance sheet (compared to a current market cap of $3.4 billion). Google, meanwhile, had a disappointing third quarter (read our post-earnings analysis of Google) and we’re a bit wary of that company for now. It does trade at only 15 times forward earnings estimates- a small premium compared to Yahoo- but this multiple is dependent on analyst expectations for better earnings numbers in 2013, in contrast to the decline in net income last quarter compared to a year earlier.
Microsoft’s revenue and earnings were down in the third quarter versus a year ago as well, though in that company’s case it’s likely that at least some of the decline comes from customers waiting for new versions of Windows and Office. These releases are expected to pull forward earnings up to the point where the P/E multiple for the fiscal year ending in June 2014 is 9, and Microsoft does pay a 3.2% dividend yield at current prices, but we don’t like the uncertainty emerging over the new version of Windows. We would need to get a better handle on how widely it will be adapted before buying. IAC/InterActiveCorp carries a trailing P/E of 26 but is expected to see high growth in the next several years: its forward P/E is only 15 and its five-year PEG ratio is 0.7. We think that the sell-side is being too optimistic here, particularly as earnings were barely higher in the second quarter than in Q2 2011, and so we’d avoid this stock as well.
Yahoo didn’t need to get better immediately- it just needed to get better. Thus far, the company seems to understand that and its numbers seem to be holding steady while some if its peers are not doing quite as well. We’re still not sure we’d buy it, including over Google, but we certainly like the company’s progress.