Investors May Finally Greet Yahoo! Earnings With a Cheer
It’s early days, but the turnaround at Yahoo! seems to be boosting the company’s bottom line already, with StarMine models signaling a positive surprise for the second quarter.
Yahoo! (YHOO.O) has spent recent years in the headlines for all the wrong reasons. With 20/20 hindsight, when its board rejected Microsoft’s (MSFT.O) $33 a share offer to acquire the company in 2008, it made one of the priciest errors in American business history. Today, the market capitalization of Yahoo!, which the Microsoft offer had valued at $44.6 billion, stands at only about $19 billion, and the stock has traded at around $15 a share for most of the last two years. Jerry Yang, its co-founder, widely blamed for the collapse of that deal as well as other Yahoo! missteps, finally resigned from the board in January of this year. Then, only months later, newly-appointed CEO Scott Thompson ran full tilt into his own problems, when it was revealed that either he or the company had misstated the nature of his academic degree.
So it must come as a relief that the company’s fundamentals are showing signs of improving. Yahoo! has struck a deal to sell back half of its sometimes-controversial 40% stake in Chinese internet portal Alibaba, a transaction that was announced in the second half of May. A new search agreement reached with its onetime suitor, Microsoft, will finally allow Yahoo! to return to its core competency — advertising — while job cuts announced in April will save the company about $375 million, it predicted. The icing on the cake for investors? The current quarter shows that the company has a positive Predicted Surprise of 2.6%, indicating that the latest reports by top-tier analysts expect that Yahoo! will report earnings that are higher than the I/B/E/S consensus estimate. That leads the Thomson Reuters research team to believe that Yahoo! is likely to deliver a positive surprise and beat that consensus figure when it reports its earnings for the second quarter on July 16.
That still-muted optimism for Yahoo! is visible in the increase in both the StarMine SmartEstimate (represented by the blue line) and the I/B/E/S consensus estimate (represented by the gold line) in the last 90 days. The SmartEstimate stood at 20 cents a share just 90 days ago, but has risen since then to its current level of 23 cents a share. The consensus estimate has followed the SmartEstimate higher and currently is only just a fraction of a cent below the SmartEstimate. Notably, however, one of the most recently-published analysts’ estimates for Yahoo! earnings comes from a five-star rated analyst, who calls for the company to report earnings that are higher than the consensus.
The turnaround at Yahoo! can be illustrated by the chart below, which captures the improvement in the company’s performance by the three most popular margin measures: the gross margin, the operating margin and the net margin. As its revenues have fallen, Yahoo! management has focused on cutting costs and the strategy has paid off; gross margins (represented by the dark red line) have climbed from 66% in 2009 to 82% in the most recent quarter. Even more encouraging is that the gross margin has gone from being 4 percentage points below the industry median (represented by the light red line) to being 12 percentage points above it in the most recent quarter. The operating margin (green line) and net margin (blue line) levels have seen similar improvements in the past three years. If Yahoo! succeeds in stabilizing its revenues by effectively competing against online advertising rivals like Google, its earnings could move higher.
Yahoo! has a StarMine Analyst Revisions model (ARM) score of 99 (on a scale of 1-100), indicating that analyst sentiment is very positive. Not surprisingly, a bit more stability among the company’s top executives would help reinforce that in the eyes of investors. But even at this early stage, the fundamentals suggest that a company that many had written off as teetering on the brink of collapse just a few years ago may now be in the very early stages of a recovery. Many things still can go wrong for Yahoo!, but in the short term, at least the earnings picture looks more rosy, as the company’s positive Predicted Surprise signals that it’s likely the company will report better-than-expected earnings for the second quarter of 2012 next month.