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Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Google Inc. (NASDAQ:GOOG) fares in the ModernGraham valuation model.

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GOOG Chart

GOOG data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $1,172.80
MG Value $1,222.35
MG Opinion Fairly Valued
Value Based on 3% Growth $460.37
Value Based on 0% Growth $269.87
Market Implied Growth Rate 14.22%
Net Current Asset Value (NCAV) $146.73
PEmg 36.94
Current Ratio 4.58
PB Ratio 4.51

Balance Sheet – 12/31/2013

Current Assets $72,886,000,000
Current Liabilities $15,908,000,000
Total Debt $2,236,000,000
Total Assets $110,920,000,000
Intangible Assets $17,558,000,000
Total Liabilities $23,611,000,000
Outstanding Shares 335,830,000

Earnings Per Share

2013 $36.05
2012 $33.42
2011 $29.76
2010 $26.31
2009 $20.41
2008 $13.31
2007 $13.29
2006 $9.94
2005 $5.02
2004 $1.46
2003 $0.41
2002 $0.45

Earnings Per Share – ModernGraham

2013 $31.75
2012 $27.95
2011 $23.68
2010 $19.31
2009 $14.67
2008 $10.74

Conclusion:

Google has exhibited outstanding growth in earnings, but remains suitable only for the Enterprising Investor. The company’s lack of a long dividend record as well as high PEmg and PB ratios make it unsuitable for the Defensive Investor at this time. Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research, including a review of ModernGraham’s valuation of Apple Inc. (NASDAQ:AAPL) as well as ModernGraham’s valuation of Microsoft Corp (NASDAQ:MSFT). From a valuation perspective, it is important to look at the growth in the EPSmg (normalized earnings), which have gone from $14.67 in 2009 to $31.75 for 2013. This solid level of demonstrated historical growth supports the market’s implied estimate of 14.22% earnings growth, and leads the ModernGraham valuation model to return an estimate of intrinsic value that falls within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Google Inc.? Where do you see the company going in the future? Is there a company you like better?

Disclaimer: The author held a position in Apple Inc. (AAPL) but none of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Source: ModernGraham Quarterly Valuation Of Google