Google Shares Get Cheap

Standard & Poor’s downgraded Google (NASDAQ:GOOG) to sell last week after its $12.5 billion acquisition of Motorola Mobility (NYSE:MMI). Then, after Google’s stock price fell, S&P changed its rating to hold. What’s an investor to think?

The reason for the original downgrade was that if Google were to enter the smartphone manufacturing market, the business would be hit with higher costs, which would hurt Google’s profits and put it in conflict with its current partners who make Android-platform handsets.

But now S&P analyst Scott Kessler believe that the Motorola Mobility acquisition could give Google a strong patent portfolio and that the decline in its stock to $500 — S&P’s price target — means that the stock is now appropriately valued after declining
20% (On Wednesday, the stock was up 1.6% to $527).

Here are four reasons to consider picking up Google’s stock:

  • Low-priced. Google’s price-to-earnings-to-growth ratio of 0.94 (where a PEG of 1.0 is fairly priced) means it is slightly cheap. Google has a P/E of 18.7 and its earnings are expected to grow 19.8% to $37.14 a share in 2012.
  • Good earnings reports. In its most recent earnings report last month, Google blew away Wall Street’s expectations. Including this report, Google has beaten earnings expectations three out of the last five quarters. This ability to beat expectations fairly consistently, and by decent margins, is a good sign for Google’s stock price.
  • Out-earning its cost of capital. Google is earning well in excess of its cost of capital and that’s growing. How so? It is producing positive EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In the first six months of 2011, Google’s EVA momentum was 1%, based on annualized first six months’ 2010 revenue of $27.2 billion, and EVA that grew from $2.9 billion for the first six months’ annualized 2010 to $3.0 billion for the first six months’ annualized 2011 using a 9% weighted-average cost of capital.
  • New revenue stream in Google+ and continued Android success. Google+ (still in an invite-only beta-like stage) already has 10 million members, while more than 550,000 Android phones are activated each day. And with its new Chrome OS operating system just getting started on PCs, Google is showing that it is much more than just a search engine.

The recent market slump has created some buying opportunities for great companies. With Google trading about 25% below its all-time high in December 2007, concerns about the Motorola acquisition are overblown. The company has many strong fundamentals and the stock price doesn’t fully reflect them.

Peter Cohan has no financial interest in the securities mentioned.

Article printed from InvestorPlace Media,

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