What Sue Decker Sees in Yahoo! (YHOO)

The wires were abuzz on Friday with news that Yahoo’s new president (and former star Wall Street analyst) Susan Decker had plunked down $1.1 million to buy 47,000 shares of YHOO in the open market.  In general, reporters tend to make too much of these purchases given that such sums are the equivalent of couch change for senior execs (a prime example being the reaction to news that Time Warner’s CEO, Richard Parsons, had bought $500,000-worth of stock two weeks ago).  That said, buying is better than selling, and Sue’s no moron.

So, assuming this isn’t some estate planning or tax move and Sue’s actually bullish, what might she be excited about?

  • First, a management change.  Terry’s gone, and Sue might well believe that she and Jerry can do better.  Lord, we hope so.
  • Second, an undervalued stock.

At $23, Yahoo’s market capitalisation is $32 billion.  Back out $3.2 billion of cash, and you’re down to $29 billion.  Back out $8.4 billion of equity interests in Yahoo Japan, China’s Alibaba (soon going public), and Korea’s GMarket, and you’re down to about $21 billion, or $15 per share.

Yahoo generated about $1.2 billion of free cash flow over the past year, or $0.85 per share.  This means that the Yahoo business itself is trading at about 18-times trailing cash flow.

Is that screamingly cheap?  No.  If it were screamingly cheap (less than 10x cash flow), Sue probably would have bet the ranch.  But for a company with these growth prospects, it’s certainly cheap.

Disclosure: I’ve owned YHOO forever.  Photo: Valleywag.

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