The Zacks Analyst Blog Highlights: Microsoft, Yahoo, AOL, Google and Zimmer Holdings

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Nov 11, 2011, 09:30 ET

CHICAGO, Nov. 11, 2011 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Microsoft Corp. (Nasdaq: MSFT), Yahoo Inc. (Nasdaq: YHOO), AOL Inc. (NYSE: AOL), Google (Nasdaq: GOOG) and Zimmer Holdings (NYSE: ZMH).

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Here are highlights from Thursday's Analyst Blog:

Yahoo-Microsoft-AOL Online Ad Deal

Microsoft Corp. (Nasdaq: MSFT), Yahoo Inc. (Nasdaq: YHOO) and AOL Inc. (NYSE: AOL) have come together to sell each other's extra online ad space in an attempt to compete with Google (Nasdaq: GOOG) and the social networking ace Facebook.

Google has been the leading search engine for a number of years. However, market dynamics appear to be changing now, with companies scrambling to build their brands in the fast-growing ecommerce market. Independent research firms are therefore predicting that display ads will overtake search ads in terms of revenue by 2015. Therefore, Google is racing to build a position in the space to protect its online advertising revenue.

Facebook in the meantime has become extremely popular with users, so much so that it is already the most popular social networking platform. The company is now leveraging this position (and the user data collected) to sell ads. The user data is in fact proving to be invaluable, since it enables the company to target ads very effectively. Additionally, Facebook primarily uses display ads, where growth rates are expected to be higher.

Facebook is gearing up to lead the U.S. display market this year, with an estimated 17.7% share of spending by advertisers, compared with Yahoo's 13.1% and Google's 9.3%, according to eMarketer, an online research firm.

On the other hand, Yahoo, Microsoft and AOL have repeatedly failed to deliver. Microsoft and Yahoo have an agreement that gives Microsoft access to Yahoo user data in exchange for the cost of powering Yahoo searches. However, all this has achieved so far is higher costs for Microsoft and market share losses for Yahoo. As a result, Microsoft's online division continues to generate losses, although at a declining rate.

The agreement, to operate in the U.S.and Canada, calls for sharing of revenue generated, although Microsoft will not be a party to business generated in Canada. Microsoft and Yahoo will initially serve as the two marketplaces from which the partners would procure inventory for resale to advertisers and agencies. AOL has the option of using its own exchange technology subsequent to the partnership's launch in January 2012.

The alliance between the three is basically a way of cross-selling excess inventories in a way that would not attract anti-trust watchdogs. Microsoft, Yahoo and AOL hope that the extension of their individual markets as a result of the alliance would enable them to lower their inventories and generate additional ad dollars. However, while there could be some positive impact, we will take a wait-and-see approach because all three companies have been struggling. Therefore, a remarkable improvement may not be on the cards.

Currently, Yahoo and Microsoft both have a Zacks #3 Rank, implying a short-term Hold recommendation.

Zimmer Holdings to Raise Funds

Leading orthopedic medical devices company, Zimmer Holdings (NYSE: ZMH) has decided to sell $550 million of senior notes through an underwritten public offering. The offer, consisting of $250 million of 1.40% notes due 2014 and $300 million of 3.375% notes due 2021, will close on November 10, 2011.

Apart from general corporate purposes, Zimmer plans to use the net proceeds of the offering to repay a substantial portion of the outstanding borrowings under its credit facility. The company exited the most recent quarter with $553 million in cash and cash equivalents, down from $668.9 million at the end of December 2010 with long-term debt of $1.5 billion ($1.1 billion at the end of fiscal 2010). Debt as a percentage of total capital stood at 21.6% during the reported quarter compared with 16.5% at the end of 2010.

Net interest expense declined 17.6% year over year to $11.7 million on the back of swapping a portion of fixed-rate debt to floating rates. Meanwhile operating cash flow increased 9.5% to $350.6 million as restructuring and transformation programs improved efficiency in inventory deployment.

With a strong cash balance, Zimmer intends to return 1/2 of its net income to stock holders through annual share repurchase programs and target suitable acquisitions in the musculoskeletal space. The company repurchased 10.1 million shares for $549 million during the quarter and is left with $299 million of authorization (expires at the end of 2013). Due to this ongoing share repurchases, Zimmer reduced its share count by 8.6% over the last 12 months, thereby supporting the bottom line.

Our Take

Zimmer offers a broad line of reconstructive implant and trauma products, as well as orthopedic surgical instruments and supplies. We believe that the company is on its growth trajectory through new product launches, employment of new technologies and expansion into the emerging markets.

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