Rating Du Jour 11/26: Goldman Sachs Takes on Yahoo! (YHOO)

November 26, 2012 8:00 AM EST
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Price: $42.40 --0%

Rating Summary:
    20 Buy, 26 Hold, 5 Sell

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Today's Overall Ratings:
    Up: 15 | Down: 17 | New: 10
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Join SI Premium – FREE's Rating Du Jour for November 26, 2012 is Goldman Sachs' call on Yahoo! (Nasdaq: YHOO).

The firm added Yahoo! to its venerable "Conviction Buy List" and raised its price target to $24, suggesting 29 percent upside from current levels.

The gist of the call centers around Yahoo!'s capital allocation moves (i.e. share repurchases), which the firm says provides a catalyst for the stock. Based on its most recent filings, Yahoo has repurchased 54.4 million shares year-to-date for $858 million. Of that $212 million came in the fourth quarter through November. $2.792 billion, 13% of its current market cap, or 76.5% of the capital committed to the buyback from the first tranche of the Alibaba monetization remains, Goldman notes.

On Yahoo!'s core business, Goldman is raising estimates to reflect a less pessimistic view the search business, given signs of RPS improvement continue, and their forecast for upcoming cost reductions. Goldman's 2013 revenue and adjusted EBITDA estimates go up by 3% and 12%, while 2014 estimates go up 7% and 28%, respectively.

Goldman sees an even higher price tag for Yahoo! of $32 per share in a "full monetization scenario." This assumes a value for the Alibaba group of $38.5 billion, which is 8x estimated 2012 sales for the group, in-line with other Chinese internet names such as Baidu and Tencent. They value Yahoo Japan's stake at $332/share. Assuming Yahoo is able to sell the assets at these values and use the cash to buyback shares, they get to a value of $32/share including the core business.

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