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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week


January 23rd 2009 Google
Nasdaq Symbol: Goog
Industry: Internet Advertiser
Price as of Jan 23rd: $324.70

2009 is not looking any better than 2008. A lot of uncertainty within the markets and with the new administration. One thing is certain, the economy will get worse before it gets better. Hopefully the economic stimulus package will get passed soon. In the meantime it's tough to recommend or feature stocks. Defensive stocks are back in vogue as a place to hide. But when the market rebounds the defensive plays will get left behind. Over the last several weeks I have featured big cap techs for growth plays. The one advantage of the big cap techs is their balance sheet with billions in cash and no or little debt. But the big caps are not immune to the economic slowdown. Intel is consolidating five plants and laying off 5,000 jobs. Even the mighty Microsoft missed estimates this week and announced layoffs. Microsoft's stock dropped to a 11 year low. The featured stock this week is Microsoft's biggest rival, Google. Google is one of the rare companies to actually beat earnings estimates this quarter.
Thursday night, Google reported earnings of $5.10 a share beating estimates by 15 cents. Revenue climbed 18% to $5.7 billion beating estimates although this quarter marked the first time Google's revenue growth fell below 30% from the previous year. Google took a number of charges in the quarter. The market downturn forced Google to write down $1.1 billion of the combined $1.5 billion that it had invested in two troubled companies, AOL and Clearwire. The company also took another charge for allowing its 20,222 employees to swap out of their outstanding stock options for new ones that will carry a lower exercise price. That's nice of Google. The CEO of Google made comments that their business is quite healthy, especially given the economic climate. In a sign that skittish consumers are still coming to Google when they want to shop, the fourth-quarter volume of clicks on Google's ads rose by 18% from the same time in 2007 thanks in part to weaker rivals in Yahoo and Microsoft. The next few quarters, as we know, will be difficult. In a recession less commerce translates into fewer transactions and possibly less revenue for Google. Google doesn't know how long the economic downturn will last, but they say they are prepared to get through this, no problem.
The balance sheet remains strong at Google. The debt level remains at zero and the cash position has grown to $14 billion. The book value has risen to $87 a share giving the company a book value ratio of 3.7. Not bad. Analysts currently expect the company to make $21 a share translating into a PE of 15.5. Google also trades for 5.8 times sales.
The analysts remain bullish on Google. Friedman Billings believes Google remains the best-positioned company in the Internet space, particularly given the challenging macro environment. At Amtech, the analyst believes Google's management is exercising discipline and the company should emerge in a stronger competitive position when the recession eventually subsides. Lets hope this occurs sooner rather than later.