Google - A Story of Bad Debt Management
Glen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Fire the people making Google's financial decisions. That's the point I am about to make, and for good reason. I believe that if we had financial professionals running the ship, the common shareholders would be 37% richer --- instantly. That doesn't even take into account that Google very well should be trading 87% higher based on my analysis if the right people were making the right financial decisions.
I finally found my copy of Ben Graham’s Security Analysis that I had been looking for for several months. It was under my nook. Shows how much I read digital books. Ben Graham’s Security Analysis recommends that “The optimum capitalization structure for any enterprise includes senior securities to the extent that they may safely be issued and bought for investment.”
I was curious what Google’s intrinsic valuation would be worth if allocated a reasonable amount of debt. So I took a look. I am appalled. I will take you on my walk on the wild side.
There will be two overriding criteria. Note that these are VERY conservative given the profile of the company.
- Net Debt not to exceed 3.5x extrapolated 12-month EBITDA
- 12 month EBITDA to exceed 3.5x the trailing 12 month finance charges
Google’s 2011 EBITDA came in at $16B. That implies to me that they could safely take on $50B of net debt. Considering that they presently have -$50B of net debt, because of their monster cash position, that would effectively be Google (NASDAQ: GOOG) taking out a $50B long term loan with staggered maturities and kicking out a $100B one time dividend.
Their present market capitalization is $183 million, which as I’ve illustrated before, is market crash pricing. So, Google is cheap to begin with. If Google was run like a real business, they’d take on the debt, issue a one-time $300 dividend per share and trade at a valuation of 15x the TTM EPS of $33, yielding a valuation after the one time dividend of roughly $500. I actually think that Google deserves a 20x multiple and if you look at where I think their 2012 earnings are going to come in at, $38, that would put my actual target price for Google at $300 + 20 x $38 = $1060.
No matter how you slice it, Google is cheap. Will they care about their shareholders and unlock the value? That is to be determined.
Glen and his investors own Google.