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4689.JP - Yahoo Japan


Picasso
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Lately I have been focusing more on attractive GARP stocks.  Yahoo Japan seems to be somewhat under the radar despite its relative large $21 billion dollar market cap and attractive qualities. 

 

First let's turn back the clock 10 years to 2004.  Shares outstanding were 6.05 billion and net income stood at 25 billion yen.  The stock price was 630 yen and it traded for about 65x earnings.

 

Today you have 5.7 billion shares and net income of 125 billion yen.  The share price after that 17.5% CAGR in net income? 400 yen.  Talk about multiple compression even after massive growth.

 

Yahoo Japan has no debt, $4 billion of net cash (19% of the market cap), minimal capex around 10% of cash from ops, and the dominant search position in Japan. 

 

For 2014, there was 212 billion yen of EBITDA minus taxes of 77 billion yen and 20 billion yen of capex for 115 billion yen of FCF.  On the EV, that is a 6.3% FCF yield and on the market cap a 5% yield.  Return on invested capital is still pushing north of 20% and has been for many years.

 

I think this makes for an interesting opportunity for three reasons:

 

1) They are struggling with the same thing Google and Facebook had during the PC-mobile transition.  I purchased Google as this compression seemed almost irrelevant once you hit a 6-7% FCF yield.  Lower CPC's would be largely offset by larger volume and by the time you saw CPC's rise, the stock price would already account for this change.  Google doubled and we are still seeing CPC's declining.

 

2) Investors are shorting out the pieces of Softbank and Yahoo to create core stubs which may have a lot of value.  Roughly 70% of the shares are held by Softbank & Yahoo so there is minimal float at the same time Yahoo Japan has experienced massive multiple compression.  Probably some solid buying pressure when this lifts.

 

3) Yahoo might be stupid enough to sell Yahoo Japan to Softbank.  The mechanism for this to take place is debatable, (buy the whole, spin out certain parts, etc) but I have a suspicion hedge funds will help eliminate more upside for Yahoo (*cough* selling Alibaba way too early *cough*).  I can't think of why this is a potential negative for shares of Yahoo Japan.

 

So in the end we have a damn good business at a cheap enough price to where future growth can actual appear over time in the value of the shares.  They recently guided down earnings about 5% and shares are now down 30% YTD (more in our local currency).  I have a hard time seeing much downside but there is substantial upside in what can be a long-term compounder.

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Picasso, if you are willing to take on the basis risk you can buy $42.60 of Yahoo , sell $36.95  of BABA creating a $5.65 stub that owns $7.66 of Yahoo Japan. So you create Yahoo Japan at a 28% discount.

 

Oh, and you get $8.00 share in cash and Yahoo's operations ($6ish) too.  It requires a lot of gross exposure to create a meaningful position in the stub and for you to be short the worlds most beloved growth stories, and is certainly not without risk.

 

But if you like Yahoo Japan, you may like  Yahoo Japan at a 28% discount + 140% in cash and 100% in Yahoo core thrown in by Mr. Market.

 

And yes CoBF community, I do pimp this trade way too much. It is simply the best risk/reward I can find at this time.

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