In this article, I will take a look at Microsoft (MSFT), Baidu (BIDU) and Google (GOOG); three technology companies that may offer investors upside potential that outweighs the risks. We'll use the management effectiveness ratios, book value-share, price-sales and price-book value to evaluate Microsoft, Baidu and Google.
Additionally, macro-economic indicators are provided at the end of the article. As part of investment analysis, analysts should consider both the company fundamentals and the macro-economic landscape. The macro-economic picture in the U.S. is deteriorating. In Europe, the economy is contracting.
European officials are working towards recapitalizing the banks in Spain. Also, European officials are investigating pro-economic growth policies that would reduce the sovereign risks the region is facing. Until pro-growth policies are implemented, and Spain's banks are recapitalized, sovereign risks remain.
Investment Thesis
Google, Microsoft and Baidu have declined in value based on price-sales and price-book value ratios. Given the current valuations and effectiveness of management ratios, investors should accumulate shares of all three companies.
However, the global economy faces headwinds from potential fiscal consolidation in the US, a shock to the global financial system stemming from the European Union debt crisis and slowing growth in China. Valuations could continue to decline if risks materialize, and these issues could cause a decline 25 - 50 percent from their 2012 peak values.
Investors should consider buying put options or selling call options to protect their positions.
Rating System
Buy - Be Long
Neutral - Have No Position
Sell - Be Short
(The ratings, research and analysis in this article should be considered as starting point for further research.)
Baidu - Buy
Company v. Industry
- Return on Assets [TTM]: 39.63 v. 18.43
- Return on Investment [TTM]: 50.02 v. 23.10
- Return on Equity [TTM]: 55.74 v. 25.14
Baidu is very liquid, as current assets is roughly 4 times larger than current liabilities. The company is carrying 2.3B in debt, which is manageable.
Revenue came close to doubling in the first quarter of 2012, compared to the year-ago quarter. Revenue growth is attributable to increasing sales in online marketing services.
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Book value-share is increasing; the increase in book value-share is considered bullish.
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The share price is in a range; currently, it is in the lower portion of range or the previous support zone.
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Price-sales is declining and may be near a trough.
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Price-book value is declining and may be near a trough.
Google - Buy
Company v. Industry
- Return on Assets [TTM]: 15.8 v. 18.4
- Return on Investment [TTM]: 18.35 v. 23.09
- Return on Equity [TTM]: 19.59 v. 25.12
Google is very liquid, as current assets is roughly 5 times larger than current liabilities. The company is carrying roughly 4B in debt, which is manageable.
Revenue increased substantially in the first quarter of 2012, compared to the year-ago quarter. Google's earnings are high quality, and cash from operations was enough to cover any cash usage in investing and financing activities in the first quarter of 2012.
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Book value-share is increasing; the increase in book value-share is considered bullish.
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Share price is increasing; although, recently the share price has declined some.
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Price-sales is declining and may be a near a trough. The decline is caused by an increase in sales and a decline in share price.
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Price-book value has declined recently, and is near a previous trough. The decline is caused by an increase in book value and a decline in share price.
Microsoft --Buy: Increasing book value-share and valuations nearing troughs.
Company v. Industry
- Return on Assets [TTM]: 21.44 v. 13.19
- Return on Investment [TTM]: 27.87 v. 19.00
- Return on Equity [TTM]: 38.23 v. 22.79
Microsoft is very liquid as current assets is roughly 3 times larger than current liabilities. The company is carrying roughly 11B in debt which is manageable.
Revenue increased in the first quarter of 2012 compared to the year-ago quarter. Microsoft's earnings are high quality, but cash from operations was not enough to cover cash usage in investing and financing activities in the first quarter of 2012.
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Book value-share is increasing; the increase in book value-share is considered bullish.
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Share price is increasing; although, the share price has declined recently.
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Price-sales is declining and may be near a trough. The decline is caused by increasing sales and decreasing share price.
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Price-book value is declining; the valuation metric may be near a trough. The decrease is caused by increasing book value and decreasing share price.
Macro Environment
ISM Non-manufacturing PMI is declining; the decline in non-manufacturing PMI is considered bearish. ISM non-manufacturing PMI should stabilize in the coming months.
The pace of job growth has slowed in recent months and may stabilize at low levels.
CB consumer confidence is increasing and may decline in the coming months. The Expectation Index and the Present Situation Index both declined, according to the latest report.
European Union services PMI is declining and should increase in the coming months.
European Union manufacturing PMI is declining and should increase in the coming months. A silver lining from the current release of the report is that the pace of decline in Italian manufacturing is slowing. Additionally, the depth of the contraction in manufacturing has yet to reach the depth of the contraction from the financial crisis in 2009.
Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial adviser. Christopher Grosvenor does not know your financial situation and ability to bare risk and thus his opinions may not be suitable for all investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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