Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Google Inc. fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Google Inc. (Google), is a global technology company. The Companyâ€™s business is primarily focused around key areas, such as search, advertising, operating systems and platforms, enterprise and hardware products. The Company generates revenue primarily by delivering online advertising. The Company also generates revenues from Motorola by selling hardware products. The Company provides its products and services in more than 100 languages and in more than 50 countries, regions, and territories. Effective October 22, 2013, Google Inc acquired FlexyCore, a developer of software. Effective January 15, 2014, Google Inc acquired Impermium Corp, a developer of SaaS application software. Effective February 7, 2014, Google Inc acquired the remaining 88% interest in Nest Labs Inc. Effective February 21, 2014, Google Inc acquired Spider.io, a provider of online fraud detection services. Effective March 12, 2014, Google Inc acquired Green Throttle Games.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – PASS
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$460.37|
|Value Based on 0% Growth||$269.87|
|Market Implied Growth Rate||14.22%|
|Net Current Asset Value (NCAV)||$146.73|
Balance Sheet – 12/31/2013
Earnings Per Share
Earnings Per Share – ModernGraham
Google has exhibited outstanding growth in earnings, but remains suitable only for the Enterprising Investor. Â The company’s lack of a long dividend record as well as high PEmg and PB ratios make it unsuitable for the Defensive Investor at this time. Â Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research, including a review of ModernGraham’s valuation of Apple Inc. (AAPL) as well as ModernGraham’s valuation of Microsoft Corp (MSFT). Â From a valuation perspective, it is important to look at the growth in the EPSmg (normalized earnings), which have gone from $14.67 in 2009 to $31.75 for 2013. Â This solid level of demonstrated historical growth supports the market’s implied estimate of 14.22% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Google Inc. (GOOG)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
If you like our valuations, why not check outÂ ModernGraham Stocks & Screens? Â It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!
Disclaimer: Â The author held a position in Apple Inc. (AAPL) but none of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.
Logo taken from the Wikipedia; this article is not affiliated with the company in any manner.