Is Yahoo! a Compelling Buy After Earnings?

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With Yahoo! (NASDAQ:YHOO) releasing third quarter financial results and shares hitting their highest level of the year, is the Internet company a BUY, a WAIT and SEE, or a STAY AWAY?

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Shares of Yahoo clearly moved late Monday after reporting quarterly results, but the company has been lacking a catalyst. Over the past three years, shares have mostly traded in a range between $13 and $17. However, there are some encouraging signs for the company. Marrisa Mayer became Yahoo’s new chief executive in July. While past CEOs have failed to ignite a spark in Yahoo, the fact that she was a rising executive at Google (NASDAQ:GOOG) provides some hope for the future.

Like many companies in the technology industry, Yahoo has been slow to capitalize on the mobile craze. Mayer recognizes this and promises to address the issue. On the earnings conference call, she explains, “Yahoo! hasn’t capitalized on the mobile opportunity. We haven’t effectively optimized our websites, we’ve under-invested in our mobile front-end development and we’ve splintered our brands. We have more than 76 applications across Android and iOS (NASDAQ:AAPL). All of this needs to change. Our top priority is a focused, coherent, mobile strategy. We’re accelerating our efforts to build a strong technical talent base for mobile. This includes engineers, product managers and designers.”

It will be very interesting to see how Mayer places Yahoo on the mobile growth path. In the meantime, shares may receive a catalyst from the company returning capital to shareholders. Ken Goldman, chief financial officer, explains to analysts that Yahoo is considering buying back stock. He explains, “We feel strongly that we just think buying back stock at these levels is extremely attractive. Great use of cash, good for our shareholders, good for our future dilution, if you will, of our stock or less dilution, if you will. So we think it’s just a great use of that $3 billion of cash that we’ve previously committed in terms of how to use it for now.”

E = Equity to Debt Ratio is Close to Zero

The debt to equity ratio is a measure of a company’s financial leverage. A high ratio generally represents that a company has been aggressive in financing its growth and operations with debt. While this may improve some metrics such as earnings in the short-term, too much debt can have disastrous effects in the longer-term.

Looking at Yahoo’s financials for its quarter ended September 30, 2012, it has a very strong debt to equity ratio of 0.31. This includes total liabilities and total stockholder equity. In comparison, Google and Microsoft (NASDAQ:MSFT) have a ratio of 0.32 and 0.77, respectively. Facebook (NASDAQ:FB) has one of the lowest ratios in the industry with 0.12.

Conclusion

Late Monday, shares of Yahoo jumped nearly 4 percent after reporting solid earnings for the third quarter. Yahoo closed Friday higher 1% at $16.79, despite a broad market headwinds. Investors are pleased with Mayer’s start at the company. Her recognition of the mobile future and Yahoo’s lack of positioning is encouraging for the future. However, it is still too early to judge if Yahoo will be able to meet its long-term vision. This is a company that has remained quiet for the past several years. Taking into account these components of our CHEAT SHEET investing framework, we find that Yahoo is a WAIT and SEE. Yahoo does have upside potential and a strong balance sheet to buy itself time, but long-time rival Google is still the best of breed.

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