Yahoo Gets a Bullish Push from Merrill

Shares of the Internet media giant gained Monday after the Wall Street firm upped its rating on the stock to buy

Yahoo (YHOO) investors -- eager for a scrap of good news amid a slide in the share price this year and a string of high-profile online media deals from the Sunnyvale (Calif.)-based outfit's rivals -- finally got something to sink their teeth into on Monday, Oct. 30. The shares popped 3.3%% in early Nasdaq trading Monday after a bullish call on the shares from Merrill Lynch. Yahoo holders also pondered press reports that the company approached Time Warner's (TWX) AOL unit about a possible combination.

In an Oct. 30 research note, Merrill analyst Justin Post boosted the firm's rating on the shares to buy from a neutral. Post says that Yahoo, down 35% year to date, is at an "attractive entry point" entering a seasonally strong holiday period -- and ahead of the two-year effort known as Project Panama, which is designed to boost its search business. The analyst notes that in mid-October, Yahoo! formally launched new search campaign management tools, and that "monetization improvements won't meaningfully kick in" until the second half of 2007.

While Yahoo has received its share of downbeat publicity of late, Post reminds investors that the company has many, "seemingly underappreciated", assets: the largest global user base, still solid year-over-year page view growth of 24% in the third quarter, a No. 2 share in video streaming -- ahead of YouTube -- and a similar position in search query. While the company lags Google in terms of generating cash from search -- 4 cents per U.S. search, vs. 11 cents for Google (GOOG), Project Panama, designed to better match ads with search results, is expected to generate over $500 million in revenue (25 cents in EPS) over two years.

Post does underscore some risks faced by the company: The transition to Panama in the first half of 2007, Google's continued efforts to take affiliate share, social networking ad inventory competition, and the company's negative page view growth mix, as low quality pages less desirable to advertisers grow faster. He thinks it could be "too late" to buy the stock in the third quarter of 2007 when risks from the Panama rollout have passed.

Merrill's 12-month price target on the shares is $32, based on 25 times estimated 2007 free cash flow plus what the firm calculates as $7 per share in asset value. Post estimates a "downside case" of $22 per share for Yahoo if 2007 2007 EBITDA comes in below consensus estimates.

News of the Merrill upgrade helped lift the shares Monday, as they gained 84 cents, or 3.3%, to $26.18. The shares are up 16% from their 52-week low of $22.65 reached earlier in October.

While Merrill was contemplating the company's efforts to boost its existing business, a press report on Oct. 28 spotlighted how Yahoo might take the acquisition route. According to a posting on, Yahoo recently approached Time Warner (parent of Fortune magazine and about buying America Online - essentially trying to jump-start talks that broke down a year ago, according to multiple sources. The story notes that Yahoo disputes that the company approached Time Warner and says that there are no active conversations between the two companies.

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