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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


May 8th 2009 Google
Nasdaq Symbol: Goog
Industry: Web Search Engine
Price as of May 8th: 407.33

The markets have been on a nice run since the March lows. The S&P 500 moved into positive territory for the year, up 2%. The Nasdaq is now up 10%. Besides the financials and retailers, the tech sector has dramatically improved, particularly among the big caps. The one advantage of the big cap techs is their balance sheet with billions in cash and no or little debt. The featured stock this week, Google, has an impeccable balance sheet with a very bright future. Google is one of the rare companies to actually beat earnings estimates the last two quarters. The stock is up 25% since we featured it in January. But Google has had to tighten its belt, curbing expenses and announcing layoffs for the first time in corporate history. But as mentioned, the future is very bright for Google and the Internet. One major theme in our economy has been the growing importance of the Internet and the shift in advertising dollars away from newspapers to the Internet. The number of proud and influential newspaper companies now losing money is growing by the day. Last year it was the Chicago Tribune. This year, it's the New York Times, Boston Globe, and Washington Post among others. The bad news for the newspaper companies is good news for Google which has become the sole titan on the Internet for Web search. Google's market share has grown to 72% within the U.S. up from 67.93% a year ago. In many ways Google has become the supreme Yellow pages of the Internet. And advertisers have taken noticed. This trend will last for a long time helping improve Google's bottom line for the foreseeable future.
In the middle of April, Google reported earnings $5.16 per share, or $1.42 billion in net income, easily beating estimates by 23 cents. Google's first-quarter revenue totaled $5.5 billion, up 6% from last year, marking the first time the company has posted less than double-digit revenue growth since coming public. Aggregate paid clicks, which include clicks related to ads served on Google sites and the sites of their AdSense partners, increased approximately 17% over the first quarter of 2008 and increased approximately 3% over the fourth quarter of 2008. Google's better than expected earnings was do mostly to cost cuts. Google shaved its operating expenses to $1.52 billion for a 8% decline from the fourth quarter. As mentioned, Google cut its' work force for the first time by 58 employees. It should be noted they are hiring in other faster growing divisions. This transition is an about face for a company that hired 10,000 employees over the previous two years.
On the conference call with analysts, Chief Executive Officer Eric Schmidt said the company's outlook for the upcoming months remains murky. "If you look at the economic situation, we're still basically in uncharted territory," Schmidt said. "The current economic environment, which everybody on the call is very, very familiar with, remains tough. ... Google is absolutely feeling the impact."
Even in these tough times, the balance sheet continues to improve. The debt level remains at zero and the cash position has grown to $17 billion. The book value has risen from $87 to $95 a share since the fourth quarter. The stock trades for a book value ratio of 4.2. Not bad. Analysts currently expect the company to make $21 a share translating into a PE of 18 and a PE of 16 times next year's estimates. Google also trades for 5.7 times sales.
The analysts are warming up to the stock. Jeffrey Lindsay, an analyst with Sanford Bernstein, wrote that the report was "a positive sign that the company's growth and profitability will improve markedly with any upturn in the global economy."
Amtech assumed coverage on Google on Friday with a Buy and $480 target, saying the company is extremely well-positioned to benefit from the continuing increase in global access to more and more digital information and content through and increasing number of devices. While the macroeconomic environment has clearly impacted Google's growth, they believe the issues are largely cyclical, not structural, and as the economy improves, the company will be a beneficiary. Despite the recent run in the stock (up 30% YTD), firm believes that investors are giving little, if any, value to Google's emerging revenue opportunities in mobile, display, video, and enterprise.
Bernstein raises their target on Google to $600 from $460, on the expectation that improving economic conditions by the end of 2009 will reverse the recent negative trends in revenue per click seen by all search engines in recent months. The analyst expects the click trends to reverse by the fourth quarter thereby restoring Google's revenue growth to 14% year over year, which should be sufficient to drive Google's price to $600 within the next 12 months.