Will Yahoo!'s (YHOO) Turnaround Show Up In Q3?

October 20, 2009 12:01 PM EDT

Yahoo! Inc. (NASDAQ: YHOO) shares are trading lower ahead of its earnings call after the market closes today. The shares are down about 0.50% to $17.13.

Analysts currently expect Yahoo! to report quarterly Q3 EPS $0.07 on revenues of $1.12 billion. For the second quarter, Yahoo! reported EPS of $0.16, doubling the consensus estimate of $0.08. Q209 revenue was $1.14 billion, ex-TAC, compared to the consensus of $1.14 billion. Comparably,
Q208 EPS was $0.10 on revenues of $1.35 billion.

Yahoo! shares are trading 1.27% lower since their Q209 results.

Data from Bloomberg shows that 16 analysts have Buy ratings on Yahoo! and 17 have Holds, and 2 have Sell on the stock. Yahoo! analysts have an average price target of $18.67. The 'street high' estimate is $23 for the stock.

In September, Collins Stewart maintained their Buy rating on Yahoo!, and raised their target price target to $21. Collins Stewart says, "We have been suggesting investors go Long YHOO more aggressively ever since the stock reached $14.35. Though YHOO is up 20% since then, we believe its fundamental improvement story is not fully reflected in the current stock price and the valuation remains attractive. In our view, YHOO is the second largest beneficiary of the recovery in 'Net ad after Google (NASDAQ: GOOG). Additionally, the company can deliver more Op-Ex savings not only in anticipation of Microsoft (NASDAQ: MSFT) search deal but also because new Management is changing the work culture from prior silo-driven to operationally efficient. We also believe that International and MSFT search deal present future option value. We are raising our estimates and establish
$21 as our new PT (combination of higher multiple, higher estimates and updated EV for Yahoo! international)."

Earlier this month, Goldman Sachs bumped their 6-month price target on Yahoo! from $17.50 to $18.50, and maintained a Neutral rating on the stock.

Also in October, Kaufman Bros. reiterated their Hold rating on Yahoo!, raising their price target from $15 to $19. Kaufman analysts said, "Our checks with leading ad agencies indicate that the online display market strengthened in 3Q. Our checks indicated that the display market improved toward the end of 2Q and the upward trend continued throughout 3Q. Typically 3Q is a seasonally softer quarter for display and typically a down sequential quarter. However, given the significant pullbacks in advertising through 1H09 and a return to more normalized online spending levels, we expect the 3Q display market to increase on a sequential basis. Our checks indicate that display strengthened across most verticals with the exception of the travel segment. Auto advertising (11% of 1H online advertising, according to IAB) strengthened in 3Q due to cash for clunkers. Additionally, our checks indicate that financial services advertising (12% of online advertising, according to IAB) began to improve in 3Q as well.
They continue, "In total, we are increasing our 3Q net revenue estimates from $1.11 billion to $1.12 billion and increasing our adjusted EBITDA estimate from $371 million to $382 million (vs. guidance of $330 million-$370 million)."

Benchmark upgraded Yahoo! from Hold to Buy in October, 2009. Their price target was raised from $16 to $20. Benchmark says, "We upgrade Yahoo to Buy given firming display trends, low guidance/expectations, and likely cautiously optimistic commentary from management during the Q3 earnings report.Expectations for Yahoo's quarter are muted, but an in-line consolidated result is anticipated. The risk to the stock appears low, since it is trading at a recession-type multiple of 2010E cashflow (7x). Our Q3 estimates are slightly ahead of consensus at $1.14 billion in net revenue,
$393 million in operating income before depreciation and amortization (OIBDA), $0.08 in EPS, and $0.12 in adjusted EPS."

Most recent, Broadpoint.Amtech maintained their Buy rating on Yahoo!, and raised their price target from $19 to $21. Broadpoint.Amtech commented, "Post the Microsoft (Nasdaq: MSFT) deal closing and various non-core asset divestitures/closings/partnerships, YHOO should be meaningfully smaller and leaner, but should also be a significantly more profitable company.Many may be dubious about the new margin structure, but with ~50% of its revenue (Search and Fees) at potentially 75% operating margin by 2011, YHOO has tremendous leverage..."

Yahoo! will issue its Q309 results via press release at approximately 4:15 PM (EDT) on October 20, 2009. Stay tuned to StreetInsider.com's Earnings section to see our analysis of the highly-anticipated quarterly results within seconds of their release.

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• Kaufman Bros.
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