We last looked at Google ($GOOG) in mid-December. We decided to run some numbers and have a look at the intrinsic value of the com

pany. $GOOG is currently trading at US$330.16 – how does this compare with an estimate of the underlying value of the shares?

Valuecruncher Interactive Analyst Report For $GOOG – New Format

Valuecruncher produces a valuation of US$369.98 for $GOOG. This is a current valuation (an estimate of intrinsic value using a discounted cash flow model) not a target price. This valuation is 12.1% above the current share price of US$330.16.

Assumptions

• Revenue: Reuters aggregates 25 analysts covering $GOOG and the mean estimates of 2009 and 2010 revenues are US$23.3 billion and US$26.6 billion respectively. For our analysis we have used US$23.3 billion in 2009, US$26.5 billion in 2010 and US$31.0 billion in 2011.
• Profitability: We have used an EBITDA margin of 40.0% to 2011. Reuters has $GOOG‘s EBITD margin at 32.25% last year and an average of 34.8% over the last five-years. Reuters use EBITD not EBITDA that we at Valuecruncher use and this explains the difference between our numbers and Reuters. The missing “A” is amortization – the accounting treatment of the acquisition cost of intangible assets (depreciation is the same for tangible assets). For a technology company like $GOOG this is material – for $GOOG amortization was US$270 million in 2008.
• Capital Expenditure: We have assumed capital expenditures of US$2.75 billion in 2009 then US$3.0 billion per annum moving forward.
• Discount Rate: 10.5%.
• Terminal Growth Rate: 5.0%. In our assumptions we have 2010/11 revenue growth at 17.0% – we have assumed that growth eventually slows to a 4.0% long-term stable growth rate.

Our analysis incorporates the cash on the $GOOG balance sheet – Valuecruncher calculates a net debt number.

Play with our assumptions – what does your analysis say? Our model is interactive – you can change any of our assumptions.

Disclosure: None

In the spirit of The Economist’s “Big Mac Index“. Here at Valuecruncher we decided to undertake a small exercise to assess the overall current v

aluation of the New Zealand stock exchange (NZSX) – the market as a whole. Our objective was to assess whether the overall market might be over- or undervalued.

To do this we took a simplified approach. At Valuecruncher we have completed valuations for 36 of the NZX50 companies. Four of these companies are not NZ-based so we eliminated them. That leaves us with 32 companies. These 32 companies have a market capitalisation of NZ$30.2 billion – this represents just under 70% of the NZSX total market capitalisation of NZ$43.8 billion. We took these 32 companies and compared our valuations to the current share price – determining a percentage under- or overvalued. We then weighted these percentages by the market capitalisation of the 32 companies. By summing these weighted averages we came up with an estimate of the valuation of the New Zealand market.

Based on our sample of 32 companies – representing just under 70% of the total NZSX market capitalisation. Valuecruncher estimates that the New Zealand stock exchange is undervalued by just under 5%. Valuecruncher is saying that overall the market looks slightly cheap. Our numbers are included in the table below.

Hat tip to Steve Gawn at ANZ National for the idea for this analysis.

We are a little bit late with this piece – but we wanted to highlight it anyway. James Berman has a fantastic piece of analysis in The Huffington Post<

/a> called Reports of the Death of Equities: Greatly Exaggerated. In the article Berman makes a very clear case for the fundamental valuation of equities and the understanding of concepts like intrinsic value. We strongly recommend the article as outlining a framework similar to how we here at Valuecruncher look at valuing companies.

On understanding why intrinsic value matters

“To understand why intrinsic value matters, we need to step away from the panic and the bleak macro picture to understand that stocks are valued on earnings or cash flows. The latter is preferable because it strips out the accounting fictions of depreciation, amortization, goodwill write-downs and other non-cash charges. I teach my NYU students to follow the cash flows, not the earnings, because cash is what a business actually runs on.

Let’s take the example of Automatic Data Processing, or ADP (which is a core holding in both the Torray Fund, which we own for clients in separate accounts, and in the JBGlobal Fund L.P.). ADP is the largest payroll processor, the leader in a tremendously stable and unglamorous business. Due to rising unemployment, its stock has been hit hard, despite the fact that ADP has virtually no debt, an enormous cash position, healthy cash flows (even in this severe recession), and virtually no chance of going bust. I chose ADP but I could have chosen so many of the stocks now trading on the Dow, given how undervalued stocks are on a global basis.

ADP is currently trading at $32 per share, or 9 times its operating cash flows of $3.50 per share. In 1999 it was around four times as expensive, trading at 37 times cash flows. In effect, it is selling at a 76% discount to its 1999 price. People get excited when a pair of shoes, a car or a house sell at a 76% discount — but not stocks. As Benjamin Graham (the father of value investing and Warren Buffett’s mentor) liked to say, you should buy your stocks like you do your groceries, not as you do your jewelry: you should be happy to buy a stock when it’s on sale, even if a bleak environment is responsible for the sales price. As value investors often preach, you pay a dear price for a cheery consensus.”

The Valuecruncher interactive analyst report for ADP agrees that the stock is undervalued.

And on Warren Buffett

“Warren Buffett readily admits that his secret in acquiring enormous wealth was not vastly superior intelligence, prescience, or any trading strategy — but in always looking at stocks for what they really were: claims on the underlying cash flows of a business. Instead of trying to time the market, trade in and out, predict macroeconomic trends or divine the next stimulus package, he simply tried to buy businesses selling at reasonable prices relative to their cash flow and hold them for long periods of time — as they increased in value — often “forever.”

His secret was in understanding that when the price of a valuable business goes down, it’s time to buy, not sell. This understanding allowed him to hold stocks during the paralyzing market of the Seventies. At that time, the world seemed like it was coming to an end with Watergate, war in the Middle East, Vietnam, horrible inflation, recession, price controls, gas shortages, double digit unemployment and riots in the streets. But he held and bought more stocks (as he is now) because he understood the value at such prices.”

Well worth the read.

With the launch of our new interactive analyst reports we complete a monthly review of the approximately 750 valuations in our data-set. This inv

olves a review of the assumptions we are using in the valuations. We use consensus analyst estimates as the basis of our assumptions. For example – consensus analyst estimates of revenues for New Zealand’s largest listed company Telecom New Zealand ($TEL.NZ). Valuecruncher uses these numbers and our own assessments of other valuation assumptions such as the discount rate and terminal growth rate.

At Valuecruncher we then pull all of these variables together and place a valuation on the shares of the companies in our data-set and provide a recommendation. You can either simply look at our valuations – or for all the experts out there, you can change the assumptions we have used and modify the valuation. Modified valuations can be saved and shared.

With the completion of our monthly review of the companies on the NZX (New Zealand stock exchange) we decided to outline what we at Valuecruncher see as the most undervalued (the best buys).

We should note that you can always find a list of the Valuecruncher buy recommendations for the NZX from the most undervalued using our filters. The following list highlights the top five buys based on the latest review of the valuation assumptions.

Valuecruncher’s Top Five Buys On The NZX – March 2009

Number 1

Michael Hill International ($MHI.NZ) is a New Zealand-based jewelry retailer and manufacturer. Valuecruncher currently values $MHI.NZ at NZ$0.71 – 39% above the current share price.

Valuecruncher Interactive Analyst Report For $MHI.NZ

Number 2

Sky Network Television ($SKT.NZ) is a provider of pay and free-to-air television services in New Zealand. Valuecruncher currently values $SKT.NZ at NZ$5.06 – 33% above the current share price.

Valuecruncher Interactive Analyst Report For $SKT.NZ

Number 3

Hallenstein Glasson Holdings ($HLG.NZ) is a NZX-listed clothing retailer. Valuecruncher currently values $HLG.NZ at NZ$2.49 – 26% above the current share price.

Valuecruncher Interactive Analyst Report For $HLG.NZ

Number 4

Air New Zealand ($AIR.NZ) is an international and domestic airline based in New Zealand. Valuecruncher currently values $AIR.NZ at NZ$1.11 – 24% above the current share price.

Valuecruncher Interactive Analyst Report For $AIR.NZ

Number 5

Methven ($MVN.NZ) is a New Zealand company that designs and supplies taps and shower-ware. Valuecruncher currently values $MVN.NZ at NZ$1.27 – 18% above the current share price.

Valuecruncher Interactive Analyst Report For $MVN.NZ

Those are our top five buys for March 2009. You can also always find a list of the Valuecruncher sell recommendations for the NZX from most overvalued up using our filters.

Disclosure: None

At Valuecruncher we looked at Michael Hill International ($MHI.NZ) back generic cialis no prescription