An Old Yahoo write-up

Here is a write up on YAHOO (YHOO) which I wrote  and  posted  on August 12, 2011  on the Yahoo message board .

 ( click here for the original message)

Yahoo ! (YHOO)

 Let’s see it value both from ASSETS and EARNINGS point of view-
First let’s look at the  assets:
I assume receivables etc..will take care of all current liabilities.
We have $ 2.8 billion of net cash on the balance sheet
Let’s look at note 4 in the 10 -K and we find it has the following valuable assets:
35% stake in Yahoo Japan
43% stake in Alibaba group

 Yahoo Japan Corp (4689:Tokyo)
Trades in Japan and has a Mcap of $18 million and is trading near its 52 week low(check this link)

Trading at 15 X earnings .At this price, Yahoo stake is worth around $6 billion .Of course if they sell it they will incur taxes to the tune of 40 % .
So the real value comes to be $3.6 billion assuming of course the above market cap of Yahoo Japan.

 Now about the  Alibaba stake
An article recently published in Forbes laid out the following points:
Alibaba offered Yahoo! $3.5 billion cash for 15% of their 40% stake

 - If Yahoo! had accepted the deal, their 40% stake in the group would have gone down to 25%

 - Alibaba, at that price, was effectively valuing its entire group at $23.5 billion

 - This valued Yahoo!’s entire 40% stake in the group at $7.16 per share of Yahoo! stock (including the cash and their remaining stake)

 - The offer was rejected by Yahoo!, indicating they believe Alibaba Group is worth more than $23.5 billion today – I have estimated it would be worth $65 billion if Alipay and Taobao were public today.
If Alibaba is worth $23 billion then the yahoo 43% stake is worth around $ 10 billion . assuming fee and tax haircut of 40 % we get : $ 6 billion .

 Adding up these stake value to cash we get:
Cash and equivalents ------------$2.8 billion
Yahoo japan stake ----------------$3.6 billion
ALIBABA stake----------------------$6 billion
$12.4 billion

At 1.31 billion shares outstanding we get : $9.46 per share
Current price is $12 .
The core business’s value therefore comes out to be
$2.5 /per share 
Valuing the whole business at $3.3 billion.

 Let’s see the operating business’ 5 year history of quality metrics. ( IN BILLION $)
YEAR SALES    FCF       FCF MARGIN CROIC
2010 $6.3        $0.500                8%              6%
2009 $6.4        $1                      15%            11%
2008 $7.2        $1.2                   16.6%         13%
2007 $7           $1.3                   18%            19%
2006 $6.4        $ 0.680              10%             11%
A business with average CROIC of 12 % and FCF  margin of 13%
And average free cash flow  of $1 billion
Even with declining sales it’s at least worth 8X free cash flow
Or $8 billion.
Alternatively , let’s assume it has pre tax return on tangible equity of 5 % .
Or 5% of $10 billion or $500 million of EBIT
Assigning a multiple of 10 on this earning power we get $ 5 billion
So the operating business is at least worth between $ 5 billion - $ 8 billion.
So adding its stakes we get a (12 + 5 ) or (12 + 8)
The whole company is conservatively is worth between
$17 billion dollars to $20 billion …
And the business is not worthless but has lot of potential.
A recent article in Bloomberg stated that :
Google’s share of the U.S. search market declined to 65.1 percent last month from 65.5 percent in June, while Yahoo’s rose to 16.1 percent from 15.9 percent, according to the Reston, Virginia-based ComScore.Microsoft Corp. (MSFT) was unchanged at 14.4 percent.

 Tantalizing valuations for a takeover
In fact Microsoft offered a bid of $44 billion in February which was rejected by yahoo.

 So we estimate its  intrinsic value between $13 to $15 conservatively ...perhaps more .

 Disclosure: I own Yhoo shares.