Google (GOOG) and IBM (IBM) reported good quarters last night, and the stocks are both up this morning as if the companies had great quarters.
Google’s 2012 Q4
Google’s numbers are tough to read through. There’s the acquisition of Morotola Mobility worked into these figures. The Motorola buy wasn’t a good move for Google, as it continues to hurt GOOG profits.
Overall, Google’s revenue grew 49% (with Motorola) and “core revenue growth” was 21% to 24% depending on who you ask and which report you read. Profit growth was $10.65 (Thomson has $10.59) vs. $9.50 a year ago for 12% profit growth (11% if you follow Thomson as I do).
Here’s my GOOG Fair Value as of last quarter. With 11% profit growth, a P/E of 15 is generous for me. Right now with GOOG at $740 the stock is selling for 16 times earnings. If the stock jumps another 10% then it will be selling for 17.5 times earnings. That would be high, I don’t think Google is worth that.
I feel investors are happy because GOOG is up $40 today, but that’s only 5%-6% higher than yesterday’s close. People are enamored with big numbers, and $40 up is seen as wonderful, $40 down is terrible.
IBM’s 2012 Q4
IBM posted 13% profit growth last quarter on flat revenue growth. This company is big and does what it can to raise profits even though its tough to grow revenue.
Last quarter, the company bought back $3 billion worth of stock and paid out a dividend of around $1 billion. The market cap on IBM is $220 billion. $3 billion in buybacks per quarter for a year would be $12 billion overall which would be around 5% of the shares outstanding each year (this is pushing up EPS).
Here’s my 2012 Q4 Fair Value on IBM. I feel this company isn’t given the credit it deserves for growing profits each year and think the stock should have a 15 P/E. It had that years ago. IBM buys back stock and pays a dividend (1.6% now), Google does neither.
Sharek’s Take
I like both GOOG and IBM but feel IBM is a more conservative investment. GOOG sometimes beats, sometimes misses. Google missed the prior four quarters before beeting by just a bit last night. And oh by-the-way last quarter’s estimate was slashed by $1.26 a quarter ago, then the company beat this lowered number by 8 cents. So don’t get me started on why the stock is up after the company has figures lowered by a lot then beats by a little.
What Google does have going for it is 20% revenue growth. If management desides to stop investing in new things (wasting money) then it could easily improve profitability. With revenue growth of 20% profits should be growing at 20%, but Google management doesn’t care what I think.
The bottom line is Google raised profits 11% and has a 16 P/E. IBM raised profits 13% and has a 12 P/E. In the battle of GOOG vs. IBM I’d place my money in IBM.
