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Needham Ups Target to $26; Buybacks Could Lift Shares

Shares of Yahoo! (YHOO) are up 18 cents, or roughly 1%, at $19.53 after Needham & Co.’s Laura Martin raised her price target on the shares to $26 from $19, arguing that the current price suggests only $4 of the stock price is based on the fundamentals, with the rest representing the after-tax value of the Yahoo! Japan stake and its Alibaba Group Holdings share.

That means, Martin argues, that Yahoo!’s main business is only getting a forward P/E of 3.3 times, and a multiple of revenue of 1 times, making the “risk/reward attractive.”

Martin’s discounted cash flow model takes the cash on hand at the end of the September quarter, $8.4 billion, adds in the non-consolidated assets’ value of $9.72 billion, and combines that with what should be the present value of future free cash flow of $7.48 billion, and, lastly, adds in the terminal value of future cash flows, of $7.28 billion, to come up with a $31.56 billion, or $26 a share, after backing out some lease obligations and options and restricted stock.

Perhaps more important than the model, Martin notes Yahoo! is prepared to buy back a ton of shares, and that there’s precedent in AOL (AOL) for seeing that help the stock:

YHOO has committed to buying in $3.6B of its shares (about 9 days of trading volume) in 2013, using proceeds from the sale of half of its Alibaba stake. By way of a benchmark, AOL repurchased $600mm of its shares from the proceeds from its patent sale, buying in 13 days of its trading volume. This buyback drove AOL’s share price up by 40% in 2H12, we believe because owners are well aware of the hidden value in these types of stocks. If YHOO’s share price behavior mirrors AOL’s, we think YHOO’s price could hit $26/share on the share buybacks alone.
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