Am I clueless!
The market and the haters seem to think so.
But according to the Model Price Theory (MPT) math she is doing all the right things. Sure the market didn’t agree with my assessment – at least on Wednesday – sending the stock down over 8%.
And the haters, they are everywhere. I guess that’s what Twitter is for …expressing one’s outrage!
What was the headline reaction from the mainstream business press on Yahoo’s 4th quarter? “Marissa Mayer’s attempt to turn around Yahoo Inc. is struck in neutral.” reported the Wall Street Journal. The other headlines and business stories were less favorable in their reaction to Yahoo’s closely watched slightly declining display-ad revenue.
Clearly she placed displayed-ad revenue in the hands of her Chief Operating Officer, Henrique de Castro, one of her first hires, who she summarily fired when the quarterly results became evident several weeks ago. Mayer’s haters went into full chorus cries over the expense of such hire – fire decision over a 15-month period but you have to admit for the rest of the employees in the Yahoo organization this action probably got their attention.
So what does ModelPrice Guy see that’s so different then anybody else?
I was shocked when I saw the number.
When our computers finished calculating the numbers on Yahoo’s balance sheet the Theoretical Earnings (TE) came in at 93 cents. Back in 2013 Yahoo’s TE was almost as high as $1.40. That’s an incredible 33% reduction in TE.
I know what you are saying?
“I have no idea what Theoretical Earnings (TE) are (and nobody else does either) and why do I care whether TE goes up or down?”
The stock market cares!
Remember Theoretical Earnings (TE) is our calculation of what a balance sheet ‘in theory’ should produce in terms earnings. Every balance sheet can produce this theoretical number irrespective of the company and what they produce. This financial concept, Theoretical Earnings, is one of the foundations of Model Price Theory (MPT) and unique when thinking about financial analysis. For more detail see ‘Key Concepts’ tab for more information.
So let’s have a look at the data.
My first chart shows our calculation of Theoretical Earnings (TE) of Yahoo since the company went public. We compare our calculation of TE with the 12-month forecast of Yahoo’s earnings. Generally over the span of the company’s history as the TE expanded, or move upward, so did the earnings of Yahoo. This should make sense. As the assets increase on the balance sheet of a company the earnings should as well. Just like a bank account. As the savings value increases so does interest earned on the account.
Another way of viewing the data is taking the two series in the above chart and combining them into a ratio.
Here you can see the ratio of Earnings per Share (EPS) over our calculation of Theoretical Earnings (TE). More importantly look at this ratio since Ms. Mayer has become CEO of Yahoo, Inc. In all of my work with large capitalized public companies I don’t think I have seen this ratio rise as fast as this.
What does this mean?
An increasing ratio of EPS/Theoretical Earnings means Ms. Mayer has not only significantly grown earnings since her arrival as CEO but also has shrunk the amount of capital in the business as our TE calculation shows. In other words she is producing more earnings with less capital. This is what CEO’s are supposed to do, but rarely seen. Ms. Mayer is special in that she seems to get this fundamental mathematical aspect of leading a company and increasing the share price for investors/shareholders.
But why didn’t the market NOT like Yahoo’s 4th quarter earnings release?
This happens quite a bit in the equity markets. Yes, so much for the Efficient Market Hypothesis. Investors, analysts and traders tend to focus on the wrong metric. In Yahoo’s case it’s the analysts’ focused display ad-revenue.
Yahoo has been a dog of a stock for quite sometime but there is a turnaround happening. The same analysis that shows you a turnaround also shows why Yahoo has been underperforming. In the chart above the ratio between EPS/Theoretical Earnings has been going down to flat since 2005. One can see the change in the ratio since Ms. Mayer has taking the helm and it has been dramatic.
We have model price data and charts on every company in the S&P 500 in our database. Is there one CEO in the whole population that is turning around a company as fast as Ms. Mayer? Nope. That’s why I have crowned her one of the best CEO’s in the S&P 500. She seems to get the math, intuitively. Nobody, and I do mean nobody is giving her any credit for this dynamic turnaround, except for me of course. Everyone seems to think the stock price of Yahoo is going up because of Yahoo’s 24% ownership position in Alibaba. Alibaba maybe the focus of investors/traders but they are missing an amazing story going on at Yahoo, the company itself.
As I admitted in my first blog about Ms. Mayer, I am a fan. I had a feeling and anticipated that she would be a CEO to watch. As time passes and the model price math becomes apparent I see my confidence has not been misplaced. Hopefully we are in the early days of her tenure at Yahoo and shareholders in the company are in for a long and profitable run.
See our Model Price chart below;
Yahoo, Inc. with weekly price bars, EBV Lines (colored lines) and model price (dashed line)
For those interested, a daily updated chart of YHOO subsequent to this post will be maintained on Facebook, here.