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Trading at more than 20 times sales and 100 times earnings, Yahoo is not likely to be a stock that the value minded investor is attracted to. Even so, as Wall Street analysts clamored to raise their price forecasts on YHOO yesterday – following a better than expected quarterly report from the company on Wednesday – shares climbed by more than 10%. With so many intelligent investors suggesting that stocks could return less than 10% annually over the next decade (Warren Buffett included), that YHOO soared by more than this amount in a single session is proof of one thing: after 3-years of apologizing and paying fines the Wall Street momentum machine is well funded and back in full force…the ‘mania’, for lack of a better term, is back.
Rather than argue that current/future price-to-whatever ratios mean that Yahoo’s share price is overvalued (which they do), it is more helpful to contemplate one of the potential negatives that few seem to be mentioning. This negative can be highlighted when looking at perhaps the most positive aspect of Yahoo’s financials: cash flow.
In the last 4-quarters Yahoo has generated more than $400 million in cash flow. Using the company’s current stock price/outstanding share totals, this means the company is trading at roughly 60 times cash flow.
Before arguing that paying 60 times cash flow is probably insanely risky – which it is – a quick look into the numbers further spooks the value minded investor.
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As the above chart demonstrates, the tax benefits Yahoo receives from exercised stock options – marked in the company’s statement of cash flows – are extremely volatile. This has a lot to do with the fact that more options are likely to be exercised after, or as prices rally (or when more options are ‘in the money’). Regardless, as many companies aim to reduce stock option issuance, FASB tries to expense options, and more companies opt for dividends instead of buy backs, companies that have cash flows that are heavily dependent upon stock option benefits could suffer.
How many Wall Street analysts are noting this potentially negative aspect of Yahoo’s cash flows? The better question might be how many fund crazed investors care?…
As for the premium the investor pays on Yahoo’s free cash flow – this works out to a multiple of roughly 120 (including tax benefits from exercised stock options). Yahoo did not provide free cash flow forecasts in their recent quarterly report. |
