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July 17, 2013

Stock of the Day

Recommendation: A-rated Buy

Welcome to the Stock of the Day for July 17, 2013. An entire year has come and gone since Marissa Mayer left Google Inc. (GOOG) to take the helm at Yahoo! Inc. (YHOO). And what a year it has been. With new management and a bunch of new acquisitions under its belt, Yahoo is no longer the cautionary tale that it used to be. But can Mayer keep up the momentum? The latest earnings results shed some light on the matter; read all about it here.

Company Profile: Yahoo! Inc. is one of the world's largest internet corporations. With nearly 12,000 employees and operations in 25 countries, Yahoo is widely recognized for its web portal, search engine and email service. This stock is a testament to how quickly new opportunities can open up in the tech sector. In the 1990s and early 2000s, Yahoo was the darling of the internet industry. But in the new millennium the company has had some difficulty adapting to increased competition and lightning-fast upgrades issued by companies like Google. The company continued to lose market share through the years until things came to a head in early 2012. That year, Yahoo saw 14% of its workforce cut and the ouster of then-CEO Scott Thompson. But then just about a year ago, former Google exec Marissa Mayer was appointed CEO and Yahoo hasn't been the same since.

Earnings Buzz: In the second quarter, Yahoo Inc. (YHOO) posted robust earnings growth despite increasing competition in the online advertising market. The average price-per-ad fell 12% but Yahoo still pulled out ahead thanks to its growing search business, ongoing cost-cutting measures plus the windfall Yahoo received from selling its stake in Alibaba earlier. Compared with the same quarter last year, profit jumped 46% to $331 million, or $0.18 per share. This includes acquisition costs—last quarter Yahoo continued to buy out smaller app makers and social media players. Excluding special items, adjusted earnings came in at $0.35 per share; analysts had a consensus earnings estimate of $0.30 per share so Yahoo posted a 17% earnings surprise. Meanwhile revenues slid 7% year-over-year to $1.14 billion as the company reconfigured its strategy for its advertising business. This was somewhat offset by Yahoo's search business, which saw a 5% jump in revenues. Excluding special items, adjusted revenues came in at $1.07 billion, matching the consensus estimate.

Long-Term Outlook: This year, the company expects sales in a range of $4.45 billion to $4.55 billion, which is slightly lower than its previous guidance. Mayer stated that it may take a few years for ad sales to catch up with competitors like Google Inc. (GOOG) and Inc. (FB). In the meantime, the company plans to continue its aggressive acquisition strategy and revamping its product offering. So management remains optimistic about the long-term. Meanwhile, the company plans to continue returning value to shareholders through its $5 billion stock buyback program—of which $1.9 billion remains.

Current Ratings: Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. YHOO has improved by leaps and bounds in the past 12 months; last August, this was a C-rated hold. Since then, the stock has firmed up on two fronts: Its current level of buying pressure (as indicated by its Quantitative Grade) and its track record of topping the consensus estimate. On the fundamentals side, Yahoo! is doing well in terms of operating margin growth, earnings growth, analyst earnings revisions and cash flow. This is a B-rated stock in terms of Fundamental Grade and A-rated in terms of Quantitative Grade.

Bottom Line: As of this posting, July 17, I consider YHOO a A-rated Buy. Marissa Mayer has accomplished a lot in her first year at Yahoo and I'm confident that the company will continue to progress under her leadership.

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