Does Google Have a Rule-Making Future?
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Since the best kind of homework is the kind that you assign yourself, I’ve been following up on my reading of the Gardner brothers’ Rule Breakers, Rule Makers with a step-by-step assessment of an outfit that strikes me as falling hard into the latter category: Google (NASDAQ: GOOG). Last week, examining both the web giant’s Brand and Financial Position, it became abundantly clear that as of where they stand right now, Google has the trappings of a real-deal Rule-Maker. For today, however, the emphasis shifts away from “where they stand right now” and toward where they will stand tomorrow. Which brings us to the question at hand:
Again, our answer will be informed by six metrics set forth by Tom Gardner, all of which are decidedly forward-looking in nature. Again, I will attempt to refer to Tom Gardner by as many silly nicknames as I can muster. Got it? Good. Let’s get started:
1) Rising Gross Margins: In the words of T-Grillz: “Tracking this quarter against the same period last year, the highest praise goes to companies with gross margins that have risen, earning them three points.” Which means that Google, whose gross profits in the third quarter of 2011 accounted for .23% more of total revenues than they did in the third quarter of 2010*, once again earns a spot in the top-tier. The jump from 65.02% to 65.25% ain’t much, but hey…it’s still a jump. Score: 3 points
2) Rising Net Margins: In a turn of phrase that is strikingly evocative of my last trip to Baskin Robbins, Tom describes a dual increase in net margins and sales as a “double dip of delight” for a company’s investors. He awards three points for net margins that have risen, two for those that have fallen by less than one percent, one for those that have fallen by less than three percent, and a goose egg for everyone else. Blame R&D expenses or Global Warming, but here, for the first time thus far, Google fares rather underwhelmingly: net margins have dropped from 29.74% to 28.07%. Score: an “I’m not mad, just disappointed” 1
3) Share Buybacks: The Constant Gardner* sees a company that is actively lessening its presence in the public market as actively increasing its value for shareholders. For a company like Google, which is making it up the mountain with a paltry .02% increase in outstanding shares, he encourages “loud applause.” Score: 2 points.
4) Cash Outgrowing Debt: In the second quarter of this year, Google issued its first-ever debt offering to the tune of $3 billion. That means that their cash-to-debt ratio, which formerly stood at 100%, has now shrunk to 93%. Score: 1 point.
5) Lowering Flow Ratio: Remember the Foolish Flow? It’s a company’s current assets, minus its cash and equivalents, divided by its current liabilities. Remember the reasoning behind it? AR and inventory actually represent liabilities, and current liabilities actually represent a company’s clout with its business partners. All caught up? Good.
What isn’t good, however, is a Flowie that rises from .71 to .84 from one November to the next. It breaks my heart to do it, but I wouldn’t be a Fool if I didn’t tell it like it is. Score: 0 points.
6) Expanding Possibilities: Fool-O Numero Uno* predicates this, the most subjective of his Financial Direction criteria, upon three questions:
A) “Do my friends know about and love the company’s products?”
B) “Is worldwide expansion believable for their stuff?”
C) “Is this company accurately reflecting its performance through conservative accounting?
To which I say: yes, yes, and yes. All of my friends, and possibly everyone alive, knows and loves Google; their continued expansion is about as believable as the continued expansion of the Internet; and neither I, nor any financial news source I can find, has any reason to call their books into question. Score: 3 points
In stark contrast with their Brand and Financial Position, Google’s Financial Direction leaves a bit to be desired. Does that mean that they’re (gasp!) not perfect? Absolutely. Does that mean they’re out of the Rule-Maker running? Absolutely not. In the coming days I’ll take a look at their Monopoly Status, their overall status, and ultimately, their Rule-Making credentials. Check back to see how it all pans out.
*Nota Bene: The financial information from these quarters will serve as the basis of all the statistics used from here on out. Also: “Nota Bene” is Latin for “the Bene Note.”
*A very good film, by the way.
*With apologies to Gardner, D.; I’m a slave to rhyme scheme.
Lyons George does not hold a position in any of the above-mentioned companies.