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 5 Undervalued Companies for the Enterprising Investor. 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 specific look at how Yahoo Inc. (YHOO) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Yahoo! Inc. (Yahoo!) is a global technology company. Through the Company’s technology and insights, Yahoo! delivers digital content and experiences, across devices and globally. The Company provides online properties and services (Yahoo! Properties) to users, as well as a range of marketing services designed to reach and connect with those users on Yahoo! and through a distribution network of third-party entities (Affiliates). These Affiliates integrate its advertising offerings into their Websites or other offerings (those Websites and other offerings, Affiliate sites). Effective January 7, 2014, Yahoo Inc acquired Aviate. Effective January 24, 2014, Yahoo Inc acquired Cloud Party Inc. In February 2014, Yahoo! Inc announced the expansion of its Champaign, IL technology hub. Effective February 11, 2014, Yahoo! Inc acquired Wander LLC. Effective February 14, 2014, Yahoo! Inc acquired Distill. Effective May 13, 2014, the Company acquired Meh Labs Inc.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$22.38|
|Value Based on 0% Growth||$13.12|
|Market Implied Growth Rate||6.82%|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Yahoo Inc. is suitable for Enterprising Investors but not Defensive Investors. The Defensive Investor is concerned with the lack of dividend payments as well as the high PEmg and PB ratios. The Enterprising Investor is also concerned with the lack of dividend payments, but the company passes all of the investor type’s other requirements. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and its competitors, including a review of Microsoft Corp (MSFT) and Google Inc. (GOOG). As for the valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $0.57 in 2010 to an estimated $1.54 for 2014. This level of demonstrated growth is greater than the market’s implied estimate of 6.82% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value that is well above the market price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Yahoo Inc. (YHOO)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
If you like our valuations, why not check out ModernGraham Stocks & Screens? It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: The author did not hold a position in Yahoo Inc. (YHOO) or in any other company mentioned in the article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from wikipedia; this article is not affiliated with the company in any manner.