Sunday, February 25, 2007

Google considering Cash Flow

Very interesting piece from SeekingAlpha by Jeff Fischer:
"...True free cash flow is cash from operations minus capital expenditures minus tax benefits from stock options. Structural free cash flow (what Warren Buffett calls "owner's earnings") is net income from operations plus depreciation and amortization minus capital expenditures. These are two key ways to measure the health and growth -- or lack of it -- at a business. Both can show realities that mere earnings per share often miss. So, when we run the most recent numbers on Google (GOOG), look at what we find.

For the full twelve months of 2006, Google's true free cash flow grew 80% year-over-year, and structural free cash flow was up 89%. At first glance, this is a considerably stronger snapshot of results than we saw after the third quarter, when SFCF was only up 29% so far year-over-year, and the stock was at a heady 130x SFCF.
Today, in comparison to TFCF and SFCF value multiples of 80 and 83, the growth rates for the full year anyway are right on par, up more than 80%. That said, with sales up only 67% year-over-year in the fourth quarter, and FCF trending the same, of course growth has slowed quarterly since 2006 began. In fact, in the fourth quarter of 2006, FCF only increased 31.7% from the year before. And sequentially, fourth quarter operating cash flow was actually down 10% from the third quarter. Finally, for the full year, operating cash flow was up a relatively light 45%.
Given the much slower growth rates that are lurking under the covers, the value multiples given to the stock today will likely continue to contract. So, you can't look at the full year's 80% TFCF growth rate and assume that the 80x multiple is right-on, when you know that in the latest quarter the FCF growth rate was actually in the 30% range year-over-year. In other words, compared to the growth taking place today, the stock still has a very high premium attached. Therefore, our earlier argument, when the stock was at $505, still stands: Google is likely going to face a long period of value-multiple contraction, meaning: a flat-stock for at least a few years, when all is said and done.
This may unfold over time despite the fact that the shares look less expensive today on their P/E: a 47 P/E multiple while EPS grew 98% year-over-year in 2006 (aided in part by a much lower tax rate in the last quarter). Before long, though, growth in EPS will mirror the now slowing sales and FCF growth, growth that could slip into the 50%-30% (respectively) range by the end of this full year.
The challenges appear greater when you consider that last year capital expenditures more than doubled to $1.9 billion from $830 million, permanent headcount continued to vault, up 88% to more than 10,600 employees, and (partly in relation) operating margins on a GAAP basis dipped to 33% last quarter from 35% the year before. Additionally, share dilution ran at a high 6% last year, although management expects it to be 2% or less annually in the future..."

No comments: