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Analysts see upside in Yahoo downturn

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Yahoo disappointed Wall Street again with its fourth-quarter earnings report this week, and the stock briefly touched a 52-week low.

While analysts slashed their financial expectations on Yahoo, they stuck by their bullish recommendations, in part because the stock is so cheap it might attract a buyer for the company.

"We're maintaining a 'buy' on valuation and on the prospect of a sale if management is unable to show material improvements by year-end," Youssef Squali of Jefferies & Co. said.

"If there are strategic or financial parties interested, now is an opportune time for them to approach Yahoo," Robert Peck of Bear Stearns said.

RBC Capital Markets analyst Jordan Rohan said that with Yahoo's stock so cheap, the company will be forced to make value-enhancing decisions soon, "or activist shareholders or potential acquirers could force it upon the management team."

As of Thursday, Yahoo was only a $25.6 billion company, while its market cap eight years ago exceeded $100 billion. Back then, some on Wall street were clamoring for Yahoo to use its richly valued stock to purchase the Walt Disney Co.

My, how things have changed. Disney's market cap of $56.9 billion now dwarf's that of Yahoo's, while Google, a company that hardly existed back then but is now Yahoo's primary competitor, boasts a hefty $176.5 billion market cap.

Yahoo's sin this week was its cautious guidance, which forced analysts to reduce their estimates this year and, in some cases, next year, too, while slashing their targets for the stock.

Rohan went from $30 to $24 for his 12-month target, while Peck went from $29 to $24 and Squali from $32 to $28.

The stock closed Thursday at $19.18.

Another problem unforeseen by some investors was Yahoo's renegotiation of its AT&T deal, which now relies on a split of advertising revenue rather than recurring guaranteed fees.

Aside from the possibility that Yahoo might attract a buyer, there are other reasons to buy the stock, analysts say.

Peck, for example, notes that Yahoo trades at 9.4 times adjusted 2008 earnings before interest, taxes, depreciation and amortization, a big discount to Google, which trades at 17.5 times EBITDA.

By further comparison, the group of Disney, Viacom, Time Warner and News Corp. sell for 7.1 times EBITDA but have smaller growth expectations than Yahoo.