Two introductory comments on GOOG, before I get to our free report and overview on our Rating, which was highlight by Matt Krantz today in: “Google stock: It may be peaking, but signs point to yes“.
- I recently commented on GOOG’s innovative capabilities in Private Sector to the Rescue Part 1: The Google Price Index and Better Markets, Inc.
- My position on GOOG has a rather long history. I was bearish at the IPO as the expectations embedded in the IPO price indicated GOOG would grow profits at an extraordinary pace (30% for 15 years and reach a 32% ROIC). Well, GOOG was able to grow its profit at an even greater pace than what was embedded in the IPO price. I was wrong. And I may be wrong again when it comes to once-in-a-generation stocks like GOOG. Simply, put there a some (more like a precious few) stocks that deserve to have Very Dangerous valuations. Those stocks are rare, but they do exist. Nevertheless, I would much rather bet against Very Dangerous Valuations most of the time and be right most of the time though I may be wrong in rare instances with extraordinary companies like GOOG. Can’t win them all, but our strategy has been successful winning more than 50% of the time. See Proof Is In Performance and stock-picking accolades.
Google Inc Cl A (GOOG) earned our Attractive Rating. To get this rating, GOOG achieved excellent quality-of-earnings (1) positive and rising economic profits (as distinct from accounting profits**) and (2) a cheap valuation. As shown in our free report on GOOG, the company’s ROIC (at 37%) is in the Top Quintile of the 3000+ companies we cover. At the same time, the stock boasts a 4.2% FCF Yield.
HIDDEN GEM: GOOG has over $24,100mm in Excess Cash, a reflection of the profitability of the business and a 64% deduction to Reported Net Assets for our Invested Capital calculation.
See Appendix 4 to learn how GOOG increased NOPAT by and increased its NOPAT Margin as expenses grew more slowly than revenue. See Appendix 5 for details on how GOOG decreased its Invested Capital. Appendix 7 (in the Return on Invested Capital (ROIC) section) shows how the improved NOPAT Mar gin and Invested Capital Turns result in an increase in ROIC (to 37% from 29%) and Economic Profit, which rose by $1,312mm while Net Income rose by $2,293mm during its last fiscal year.
As per Investment Strategy 101 and How to make money picking stocks, GOOG has Attractive Risk/Reward.
**See Finance 101 and Economic Versus Accounting Profits for more detail on why accounting profits are not reliable indicators of corporate profitability or value creation.