In terms of the financials, Google Inc (NASDAQ:GOOG) has a $45 billion pile of net cash. This works out to $133 per share, 16.7% of the total market capitalization. The free cash flow in 2012 was $13.3 billion, or $41.30 per share. Backing out the cash the stock trades at an adjusted P/FCF ratio of 16.2. With capital expenditures on the rise free cash flow may be pressured in the near future, so the forward ratio is probably a bit higher.
Valuing Google is difficult because they have so many projects which could be huge. Using a 12% discount rate Google Inc (NASDAQ:GOOG) must grow FCF at an annual rate of about 8% over the next decade for the stock to be fairly valued today. Although this doesn’t seem unreasonable, Q1 saw a much slower rise if the effect of the tax rate is removed. So it really comes down to the success of the large investments made in these projects.
IBM: weakness and opportunity
IBM is Warren Buffett’s latest big stock investment, having bought over $10 billion worth by late 2011. IBM stock reached a high of $215 recently, well above the average purchase price of Buffett, but after the most recent earnings report has plummeted to around $190 per share.
What caused this huge drop? Revenue fell 5%, net income fell 1%, and EPS grew 3% driven mainly by share buybacks. Hardware sales were down 17% year-over-year, causing much of the decline. Now there’s talk of IBM selling its low-end server division to Lenovo, the buyer of its PC division back in 2004. Selling its PC division proved prescient, and IBM has generally been good at shedding its low-margin businesses to focus on its high-margin businesses.
At the same time as all of this IBM reiterated its full year EPS estimate of at least $15.53. That would represent 8% growth from 2012, at least partially driven by share buybacks. IBM had reduced its share count by 16% since 2008, spending a total of $60 billion during that time on share buybacks.
IBM has quite a bit of debt, $17.1 billion after counting the cash, and another $20 billion in pension obligations. The debt levels have been largely flat since 2008, with the cash flow funding most of the buyback efforts. IBM only paid $459 million in interest in 2012, a very low rate given the amount of debt.
If earnings do indeed come in at $15.53 this year the forward P/E ratio is about 12.1 after the decline in the stock price. With a $15 billion free cash flow each year IBM can buy back about 7% of the company annually, providing a boost to the per-share numbers.
One disappointing quarter doesn’t mean much in the grand scheme of things. Paying 12 times forward earnings for a company like IBM is an opportunity which doesn’t come around all that often. Even while facing weakness in demand buybacks can drive growth going forward. If you’ve been wanting to buy IBM, now is the time.
The article Big Tech, Big Earnings, Big Opportunity originally appeared on Fool.com.
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