Software Stocks

Yahoo! Inc Valuation – June 2016 $YHOO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – March 2016.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Yahoo! Inc (YHOO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Yahoo! Inc. (Yahoo), along with its subsidiaries, is engaged in digital information discovery. The Company’s segments include the Americas; Europe, Middle East and Africa (EMEA), and Asia Pacific. The Company focuses on informing, connecting and entertaining its users with its search (Yahoo search), communications, including Yahoo Mail and Yahoo Messenger, and digital content products, including Tumblr, and its four verticals, such as Yahoo News, Yahoo Sports, Yahoo Finance and Yahoo Lifestyle. Yahoo Search is a search engine that serves as a guide for users to discover the information on the Internet. Yahoo Mail connects users to the people and things across mobile and desktop. Yahoo Messenger is an instant messaging service that provides an interactive and personalized way for users to connect and communicate in real-time. The Company’s Digital Content offerings include Tumblr, its social platform, and its four verticals, including News, Sports, Finance and Lifestyle.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of YHOO – June 2016

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $35,863,584,368 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 6.24 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 170.34% Pass
6. Moderate PEmg Ratio PEmg < 20 48.83 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.24 Pass
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 6.24 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.21 Pass
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

YHOO value chart June 2016

EPSmg $0.77
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $11.11
MG Value based on 0% Growth $6.51
Market Implied Growth Rate 20.16%
Current Price $37.40
% of Intrinsic Value N/A

Yahoo! Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability over the last ten years, and the poor dividend history, and the high PEmg ratio. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.57 in 2012 to an estimated $0.77 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 20.16% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.

Yahoo! Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

YHOO charts June 2016

Net Current Asset Value (NCAV) -$8.94
Graham Number $16.02
PEmg 48.83
Current Ratio 6.24
PB Ratio 1.24
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Useful Links:

ModernGraham tagged articles Morningstar
Google Finance MSN Money
Yahoo Finance Seeking Alpha
GuruFocus SEC Filings

Most Recent Balance Sheet Figures

Balance Sheet Information 3/1/2016
Total Current Assets $7,224,224,000
Total Current Liabilities $1,158,010,000
Long-Term Debt $1,249,775,000
Total Assets $44,158,229,000
Intangible Assets $1,132,230,000
Total Liabilities $15,679,882,000
Shares Outstanding (Diluted Average) 945,719,000

Earnings Per Share History

Next Fiscal Year Estimate $0.38
Dec2015 -$4.64
Dec2014 $7.45
Dec2013 $1.26
Dec2012 $3.28
Dec2011 $0.82
Dec2010 $0.90
Dec2009 $0.42
Dec2008 $0.29
Dec2007 $0.47
Dec2006 $0.52
Dec2005 $1.28
Dec2004 $0.58
Dec2003 $0.19
Dec2002 $0.04
Dec2001 -$0.08
Dec2000 $0.06
Dec1999 $0.05
Dec1998 $0.03
Dec1997 -$0.03

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $0.77
Dec2015 $1.18
Dec2014 $3.64
Dec2013 $1.61
Dec2012 $1.57
Dec2011 $0.67
Dec2010 $0.57
Dec2009 $0.47
Dec2008 $0.54
Dec2007 $0.64
Dec2006 $0.66
Dec2005 $0.62
Dec2004 $0.24
Dec2003 $0.07
Dec2002 $0.01
Dec2001 $0.00
Dec2000 $0.03

Recommended Reading:

Other ModernGraham posts about the company

10 Most Undervalued Companies for the Defensive Investor – May 2016
10 Most Undervalued Companies for the Defensive Investor – February 2016
10 Low PE Stocks for the Defensive Investor – February 2016
10 Low PE Stocks for the Defensive Investor – January 2016
11 Best Stocks For Value Investors This Week – 11/21/15

Other ModernGraham posts about related companies

Alphabet Inc Valuation – June 2016 $GOOGL
Ansys Inc Valuation – June 2016 $ANSS
Citrix Systems Inc Valuation – May 2016 $CTXS
Symantec Corp Valuation – February 2016 $SYMC
Microsoft Corp Valuation – February 2016 $MSFT
Cisco Systems Inc Valuation – February 2016 $CSCO
CA Inc Valuation – January 2016 Update $CA
Intuit Inc Valuation – January 2016 Update $INTU
Microsoft Corp Valuation – February 2016 $MSFT
Cisco Systems Inc Valuation – February 2016 $CSCO

Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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