# Baidu vs. Google: A Free Cash Flow Analysis

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by: Mycroft Friedrich

I have analyzed Baidu (NASDAQ:BIDU) and Google (NASDAQ:GOOG) from a Free Cash Flow perspective to determine how those companies are doing on Main Street and let the numbers decide which is more attractive. My key ratios for analysis are Price to Free Cash flow (PFCF) and Free Cash Flow Return on Invested Capital (FROIC).

When investing I look for PFCF below 15 times and FROIC above 20%+. When you are lucky enough to find a combination of the two you find a perfect balance of growth + value and you get capital appreciation through capital preservation. Since both stocks do not meet the criteria of what I look for as an analyst, I am not investing in either. The following analysis is done purely to assist those who invest in the companies, so that they may get a better perspective of what is happening on Main Street.

Free Cash Flow Analysis cuts through the Hype and gets you to the real deal.

Always remember “the numbers don’t lie, only people do.”

For those who don't know:

PFCF = Market Price/ (Cash flow per share-Capital Spending per share)

FROIC = FCF per share/ (long term debt per share + shareholders equity per share)

FROIC basically tells you how much return in free cash flow a company generates for every dollar of Total Capital they employ.

I consider FROIC the primary determining factor in identifying great growth companies as you can compare every company (except financials) on an equal basis.

The question I ask every company I analyze is - how much return (in percent) in FCF are you going to give me for every dollar of total capital you invest?

First let’s analyze Baidu, as it was in the news Tuesday falling -11.55%.

The following are the Price to Free Cash Flow and Free Cash Flow Return on Invested Capital estimates for Baidu with data used in calculations courtesy of Thomson-Reuters;

Market price used in calculations = \$383.66

Year 2009

Free Cash Flow Per Share = \$2.86

Total Capital Per Share = \$20.54

Price to Free Cash Flow = 134 times

Free Cash Flow Return on Invested Capital = 9.88%

Year 2010

Free Cash Flow Per Share = \$4.78

Total Capital Per Share = \$29.54

Price to Free Cash Flow = 80 times

Free Cash Flow Return on Invested Capital = 13.07%

Year 2011

Free Cash Flow Per Share = \$7.70

Total Capital Per Share = \$40.10

Price to Free Cash Flow = 50 times

Free Cash Flow Return on Invested Capital = 16.76%

And now let us move on to Google.

The following are the Price to Free Cash Flow and Free Cash Flow Return on Invested Capital estimates for Google with data used in calculations courtesy of Thomson-Reuters;

Market price used in calculations = \$548.30

Year 2009

Free Cash Flow Per Share = \$22.69

Total Capital Per Share = \$112.44

Price to Free Cash Flow = 24 times

Free Cash Flow Return on Invested Capital = 20.17%

Year 2010

Free Cash Flow Per Share = \$26.05

Total Capital Per Share = \$139.61

Price to Free Cash Flow = 21 times

Free Cash Flow Return on Invested Capital = 18.65%

Year 2011

Free Cash Flow Per Share = \$33.42

Total Capital Per Share = \$175.02

Price to Free Cash Flow = 16 times

Free Cash Flow Return on Invested Capital = 19.09%

Now let us move on to the Growth rates of each company's free cash flow, generating one % number for growth from 2009-2011

Baidu = 169.23% expected growth of FCF from 2009 to 2011 (this is not annualized but compounded)

Google = 47.28% expected growth of FCF from 2009 to 2011 (this is not annualized but compounded)

There is your analysis, I have no opinion either way and will let each reader decide the level of risk that they are willing to take

As for my philosophy on investing I do the following:

FROIC gives me a real return on Main Street and if I can get a 20%+ return on Main Street and at the same time buy a stock that is selling for less than 15 times its FCF then there is a very high probability that it should be very successful investment.

By choosing 20%+ as my minimum FROIC I have built a portfolio of 29 holdings for my clients that has a combined portfolio FROIC of 32% and sells as a group for 12.35 PFCF.

As for PFCF I came up with the 15 or less number as being Ideal after performing a 58 year backtest. To view the backtest just click here (.pdf).

Disclosure: No Position BIDU, GOOG

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter "Mycroft" Psaras, and should not be construed as personalized investment advice.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.