Morgan Stanley Is Finding More In Yahoo

Morgan Stanley commented on Yahoo! Inc. YHOO Friday and addressed the value of its core business. The stock was rated Overweight with a $55 price target.

Analyst Brian Nowak discussed how Yahoo! had been a relatively inexpensive way to gain exposure to Alibaba Group Holding Ltd BABA.

Following the spin-off of Alibaba, however, more attention would be given to Yahoo!’s core business.

Nowak pointed out that Yahoo!’s core headcount was relatively large compared to its revenue. The company had 12,500 employees and generated $369,451 in revenue per employee.

By comparison, AOL, Inc. AOL had 4,500 employees and generated $561,600 in revenue per employee.

The analyst noted that if Yahoo! made an 11 percent headcount reduction, it could add $3.90 per share, or 77 percent, the its core value following the Alibaba spin.

The firm’s current $55 price target assumed core erosion, however, the workforce reduction could maintain flat EBITDA in 2015 and 2016.

Currently, the core Yahoo Enterprise Value, using a 4.5x multiple, was calculated at $5.01. Adding cash of $4.22 per share resulted in a core share value of $9.23.

The Yahoo Enterprise Value, using the same 4.5x multiple, could rise to $6.66 in 2016, following a headcount reduction, according to Nowak’s analysis.

Nowak concluded that the firm saw upside to the core business through cost reductions and that core performance would important to keep investors interested in the stock following the Alibaba spin.

Yahoo! Inc. recently traded at $45.28, down 0.78 percent.