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 companyÂ or by reviewing theÂ 5 Undervalued Companies for the DefensiveÂ Investor.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. (GOOG)Â 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. 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. In April 2014, Google Inc acquired Titan Aerospace. Effective May 5, 2014, the Company acquired Rangespan. Effective May 6, 2014, the Company acquired Adometry Inc. Effective May 7, 2014, the Company acquired Appetas Inc. and Stackdriver Inc. Effective May 16, 2014, Google Inc acquired Quest Visual Inc. Effective May 20, 2014, Google Inc acquired Enterproid Inc, doing business as Divide.
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 -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â PASS
- Dividend Record – has paid a dividend for at least 10 straight years -Â 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 -Â 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 -Â FAIL
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|MG Opinion||Fairly Valued|
|Value Based on 3% Growth||$259.60|
|Value Based on 0% Growth||$152.18|
|Market Implied Growth Rate||11.16%|
|Net Current Asset Value (NCAV)||$74.87|
Balance Sheet – 3/31/2014
Earnings Per Share
Earnings Per Share – ModernGraham
Google Inc. qualifies for Enterprising Investors but not for Defensive Investors. Â The Defensive Investor is concerned with the lack of dividend payments and the high PEmg and PB ratios, while the Enterprising Investor is concerned about the lack of dividends. Â As a result, Enterprising InvestorsÂ following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company and comparing it to other opportunities through a review of ModernGraham’s valuation of Microsoft Corp (MSFT) and ModernGraham’s valuation of Apple (AAPL). Â From a valuation side of things, the company appears to be fairly valuedÂ after growing its EPSmg (normalized earnings) from $9.15 in 2010 to an estimated $17.90. Â This level of demonstrated growth supports the market’s implied estimate of 11.16% earnings growth and leads the ModernGraham valuation model, which is based on Benjamin Graham’s methods, to return an estimate of intrinsic value that is within a margin of safety relative toÂ the market price at this time.
Be sure to review the previousÂ ModernGraham Valuations of Google Inc. (GOOG)!
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.
Disclaimer: Â The author held a long position in Apple Inc. (AAPL) but did not hold a positionÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from wikipedia; this article is not affiliated with the company in any manner.