Thursday, August 17, 2006

Calls of Note Part 2

- Citigroup notes that post soft Q2 results and the surprise announcement of a delay in its search engine "fix," Yahoo! (NASDAQ:YHOO) shares retreated as much as 25%. While the firm viewed that delay as a material negative, they believe that YHOO shares over-corrected. The top three questions on YHOO now are: 1. Can the company deliver against its new deadline? 2. Can the "fix" materially improve YHOO's fundamentals? And 3. To what extent is this "fix" already assumed in Street estimates? Based on extensive channel checks and firm's proprietary analysis of search revenue drivers, answers are: 1. A Probable Yes; 2. A Definitive Yes -- for every 100 bps improvement in YHOO's click-thru rates, EPS can increase by approx $0.04/$0.05; and 3) Street '07 estimates appear to have only modest expectations built in re: the search engine "fix." Further, they see YHOO, given its sustainable 20% EBITDA growth outlook, trading at an unjustifiably small premium to media stocks. So they reit their Buy and $40 tgt.

Notablecalls: I continue to be bullish on YHOO at current levels.

- Citigroup anticipates that Altria (NYSE:MO)'s Board of Directors could announce a dividend increase of at least 10% on 8/30. The stock should trade up on this news. Like clockwork, MO has announced dividend increases during its August Board meeting. Since 1994, MO's Board has increased its dividend 11 times.

In the past, MO mgmt has stated a desire to increase dividends in-line with earnings growth. Although a 10%-plus dividend increase is somewhat higher than its expected '06 earnings growth, they believe this is very probable given the large amount of cash on the company's balance sheet and because MO wants to keep investors interested in the stock until the break-up of the company begins in the next couple of months. Also, a dividend increase is a good use for its cash given that the company's share buyback program will be postponed until the full break-up of the company is completed. A 10% increase results in an attractive 4.4% dividend yield. Firm reiterates their Buy rating and $94 price tgt.

Notablecalls: Not actionable but good to know category. Best way to play this one? Short the common if the div hike is less than 10%.

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