Bob Peck Reveals Yahoo's 'Unique' Opportunity

• Yahoo! Inc. YHOO shares have slid 36 percent year-to-date, recovering modestly after hitting a low of $27.60 on September 28.
• SunTrust Robinson Humphrey’s Robert S. Peck maintained a Buy rating on the company, with a price target of $40.
• With the Aabaco spin expected to be completed by January, Yahoo’s CEO indicated that this would offer a unique opportunity to reset and realign, Peck mentioned.

Yahoo missed expectations for 3Q and reduced its guidance. Analyst Robert Peck pointed out, however, that the most disappointing aspects of the company’s earnings call were “the lack of tangible answers to key questions, delayed Aabaco spin transaction, and a shift in focus.”

Although the Aabaco spin is still on the cards, the timing has been shifted to January 2016. Several investors are “starting to look past the Spin to the core turnaround,” Peck mentioned, adding that there is significant skepticism around the success of the strategy.

In the report SunTrust noted, “In fact, CEO Mayer even stated that with the spin hopefully occurring by Jan. it may be a "unique opportunity to reset and realign." After 40 months, we don't know if investors have the patience.”

“Fundamentals remain challenged and the 4Q'15 outlook was materially weaker than Street estimates,” Peck wrote. He added, however, that the cheap valuation calls for the Buy rating. The price target is based on “valuations for the stakes in the Asian assets,” the report stated.

Yahoo’s core continues to be challenged. Peck cited the following:

1. Although the company has inked a Search deal with Alphabet Inc GOOGL [Rated: Buy], management is instead focusing on building the Gemini platform, which adversely impacts near-term monetization
2. Revenue growth ex-TAC, adjusted for non-traffic items recorded a 6 percent y/y decline, while organic revenues ex-BrightRoll / Flurry were even lower
3. EBITDA plunged 20 percent y/y, adjusted for non-core items, while core EBITDA declined about 55 percent and margins contracted around 8 percent
4. MaVeNS GAAP rev grew 43 percent y/y, recording a decline from 60 percent in 2Q
5. Yahoo guided to 4Q15 revenue and EBITDA below the Street expectations by 13 percent and 35 percent, respectively, due to higher investment in mobile search and lower margin distribution deals.