ARD v GOOG
Earnings are King & Why ARD is Undervalued to GOOG.
Yesterday ARD was listed as #1 on one of those top 10 lists that are often seen online at Yahoo Finance. I don't pay much attention to those lists put out by IBD and Yahoo. Sometimes terrible companies can make a list and slip through the cracks of a stock screener. However the list yesterday was right on Target to crown ARD as #1 out of 10 stocks. Some other notable stocks on that list include Google at #3 and Ultra Petroleum at #8.
The list is measuring the fastest growing companies in terms of earnings and sales growth. The opening sentence of the article stated, "One of the main drivers of a stock's price is growth more specifically, earnings..."
To get a better understanding of earnings between the two companies I decided to take a look at both the trailing 12 months earnings as well as the 2006 earnings estimates. The comparisons will give me not only an idea of where these companies have been and where they're going but also a trend relative to each other in terms of earning potential.
One more statement before we actually begin the comparisons between ARD and GOOG. I realize there will be some people who think the comparisons are without merit because one company is an oil and gas producer and the other is an internet company. While it is true that both companies are in completely different sectors they both have something that can be compared: EARNINGS.
The first step in comparing the two companies is to get a share price quote for both companies. I chose to use the opening share price for both companies on January 17, 2005. ARD opened at $32.87. For ease of math I rounded this figure to $33. GOOG opened at $463.06. To keep things simple I'll round that figure down to $463. The chart below depicts the opening share price for both ARD and GOOG.
Lets assume that one has $463 to invest. The investor is considering either an ARD purchase or a GOOG share purchase. The number of shares that could be purchased is depicted in the chart below.
The chart below displays the earnings per share (EPS) for both ARD and GOOG. An initial observationon is that GOOG earns over 7 times more on a per share basis that ARD.
However, one needs to keep in mind that with our $463 that is to be invested the choice is either 1 share of GOOG or 14 shares of ARD. It would be appropriate to determine the earnings power of that $463 invested no matter if the investment is made in ARD shares or GOOG shares. The chart below shows the total earnings power of the $463 investment.
The math for the chart above is like this:
ARD:
14 shares X $0.64 = $8.96
GOOG:
1 share X $4.51 = $4.51
To summarize the ARD shares purchased present the investor with $8.96 in earnings power. The GOOG purchase will provide the investor only $4.51 in earnings power. The chart below shows that the $463 investment in ARD shares presents the investor with nearly 2X the earnings of the $463 invested in GOOG.
The Chart above shows that the $463 invested in ARD provides the investor with an earnings advantage of 98% when compared to the similar GOOG purchase. Keep in mind that these results are based on the trailing 12 months.
Now let's take a look at the same share purchase decision except this time we will use forward earnings instead of trailing earnings. To be exact we will now compare 2006 projected earnings between ARD and GOOG. The chart below shows the amount of earnings for one ARD share and one GOOG share.
Again considering the investment decision of investing $463 the choice is buying 14 shares of ARD or 1 share of GOOG. The chart below shows the total earnings power of the $463 investment based on 2006 projected earnings.
The math for the above chart is as follows:
ARD share purchase (Remember $463 buys 14 shares):
14 shares X $1.74 = $24.36
GOOG share purchase (Remember $463 buys 1 share):
1 share X $10 = $10
By taking the above amount of $24.36 and dividing by $10 we find that the ARD earnings power is 2.43X that of GOOG. This ratio of 2.43 to 1 is depicted in the chart below.
In summary, the ARD investment using trailing earnings results in $1.98 for every $1 of GOOG earnings. When using forward projected earnings for 2006 the ARD investment will result in $2.43 for every $1 of GOOG earnings. The ARD advantage expands by $0.45 between the two periods being measured. This is a 22% increase in ARD earnings above and beyond that of GOOG when comparing the trailing 12 months period to the 2006 period going forward. Keep in mind that the GOOG high estimate for 2006 of $9.40 was increased to $10. Also keep in mind that the ARD low estimate for 2006 of $1.74 was utilized for the 2006 calculations. The $1.74 estimate is from DE Investment Research. Please read my analysis of that report that was blogged on January 13, 2005. The intentions of rounding the GOOG high estimate higher and using the ARD low estimate for 2006 was to avoid any accusations that I was in someway favoring ARD in the comparison.
The bottom line is that a $463 investment in ARD presents the investor with a clear advantage in terms of earnings power. This is true not only in absolute terms for both periods measured but also in terms of the trends going forward. As earnings is one of the most important drivers in share price appreciation potential an investor would be wise to consider the ARD purchase over the GOOG purchase. Some will claim that any comparison between the two companies is without merit. While it is true that both companies are in completely different sectors they both have something that can be compared: EARNINGS. Certainly ARD trumps GOOG in terms of earnings power. The IBD top 10 list of fastest growing companies agrees with me.
Final thoughts on ARD v GOOG
Some will say that GOOG deserves a higher earnings multiple because it is a growth stock with disruptive technology. The fact is that GOOG is a growth stock and is expected to grow earnings 30% each year for the next 5 years. Even though ARD is in the energy sector it is also a growth stock. In fact ARD has the higher earning growth prospects due not only to the growth in oil and gas production but also the expected rise in commodity prices in the next 5 years.
A company like GOOG will experience challenges with it's profit margins going forward as consumers and businesses alike must evaluate and reduce budgets for advertising and the like due to challenges with rising energy costs and the negative impact on the U.S. economy. ARD on the other hand will be experiencing a rising profit margin and improving fundamentals as geopolitical events, natural disasters, and peak oil drive oil prices higher. The energy sector going forward will provide the investor the investment opportunity of a lifetime. Peak oil will be much bigger than even the internet. Consequently the bullrun in energy stocks will make the technology bullrun of the late 1990's look small in comparison.
Here are some interesting comparisons:
Profit Margin (ttm):
ARD.......38%
GOOG...24%
Operating Margin (ttm):
ARD.......61%
GOOG...33%
Return on Equity (ttm):
ARD.......22%
GOOG...21%
Price to Sales:
ARD.......23
GOOG...26
Forward PE:
ARD.......19
GOOG...53
The purchase of GOOG shares in lieu of ARD shares would cause diworsificationon in any portfolio. I"ll stick with ARD. You would be wise to do the same.
Earnings are King & Why ARD is Undervalued to GOOG.
Yesterday ARD was listed as #1 on one of those top 10 lists that are often seen online at Yahoo Finance. I don't pay much attention to those lists put out by IBD and Yahoo. Sometimes terrible companies can make a list and slip through the cracks of a stock screener. However the list yesterday was right on Target to crown ARD as #1 out of 10 stocks. Some other notable stocks on that list include Google at #3 and Ultra Petroleum at #8.
The list is measuring the fastest growing companies in terms of earnings and sales growth. The opening sentence of the article stated, "One of the main drivers of a stock's price is growth more specifically, earnings..."
To get a better understanding of earnings between the two companies I decided to take a look at both the trailing 12 months earnings as well as the 2006 earnings estimates. The comparisons will give me not only an idea of where these companies have been and where they're going but also a trend relative to each other in terms of earning potential.
One more statement before we actually begin the comparisons between ARD and GOOG. I realize there will be some people who think the comparisons are without merit because one company is an oil and gas producer and the other is an internet company. While it is true that both companies are in completely different sectors they both have something that can be compared: EARNINGS.
The first step in comparing the two companies is to get a share price quote for both companies. I chose to use the opening share price for both companies on January 17, 2005. ARD opened at $32.87. For ease of math I rounded this figure to $33. GOOG opened at $463.06. To keep things simple I'll round that figure down to $463. The chart below depicts the opening share price for both ARD and GOOG.
Lets assume that one has $463 to invest. The investor is considering either an ARD purchase or a GOOG share purchase. The number of shares that could be purchased is depicted in the chart below.
The chart below displays the earnings per share (EPS) for both ARD and GOOG. An initial observationon is that GOOG earns over 7 times more on a per share basis that ARD.
However, one needs to keep in mind that with our $463 that is to be invested the choice is either 1 share of GOOG or 14 shares of ARD. It would be appropriate to determine the earnings power of that $463 invested no matter if the investment is made in ARD shares or GOOG shares. The chart below shows the total earnings power of the $463 investment.
The math for the chart above is like this:
ARD:
14 shares X $0.64 = $8.96
GOOG:
1 share X $4.51 = $4.51
To summarize the ARD shares purchased present the investor with $8.96 in earnings power. The GOOG purchase will provide the investor only $4.51 in earnings power. The chart below shows that the $463 investment in ARD shares presents the investor with nearly 2X the earnings of the $463 invested in GOOG.
The Chart above shows that the $463 invested in ARD provides the investor with an earnings advantage of 98% when compared to the similar GOOG purchase. Keep in mind that these results are based on the trailing 12 months.
Now let's take a look at the same share purchase decision except this time we will use forward earnings instead of trailing earnings. To be exact we will now compare 2006 projected earnings between ARD and GOOG. The chart below shows the amount of earnings for one ARD share and one GOOG share.
Again considering the investment decision of investing $463 the choice is buying 14 shares of ARD or 1 share of GOOG. The chart below shows the total earnings power of the $463 investment based on 2006 projected earnings.
The math for the above chart is as follows:
ARD share purchase (Remember $463 buys 14 shares):
14 shares X $1.74 = $24.36
GOOG share purchase (Remember $463 buys 1 share):
1 share X $10 = $10
By taking the above amount of $24.36 and dividing by $10 we find that the ARD earnings power is 2.43X that of GOOG. This ratio of 2.43 to 1 is depicted in the chart below.
In summary, the ARD investment using trailing earnings results in $1.98 for every $1 of GOOG earnings. When using forward projected earnings for 2006 the ARD investment will result in $2.43 for every $1 of GOOG earnings. The ARD advantage expands by $0.45 between the two periods being measured. This is a 22% increase in ARD earnings above and beyond that of GOOG when comparing the trailing 12 months period to the 2006 period going forward. Keep in mind that the GOOG high estimate for 2006 of $9.40 was increased to $10. Also keep in mind that the ARD low estimate for 2006 of $1.74 was utilized for the 2006 calculations. The $1.74 estimate is from DE Investment Research. Please read my analysis of that report that was blogged on January 13, 2005. The intentions of rounding the GOOG high estimate higher and using the ARD low estimate for 2006 was to avoid any accusations that I was in someway favoring ARD in the comparison.
The bottom line is that a $463 investment in ARD presents the investor with a clear advantage in terms of earnings power. This is true not only in absolute terms for both periods measured but also in terms of the trends going forward. As earnings is one of the most important drivers in share price appreciation potential an investor would be wise to consider the ARD purchase over the GOOG purchase. Some will claim that any comparison between the two companies is without merit. While it is true that both companies are in completely different sectors they both have something that can be compared: EARNINGS. Certainly ARD trumps GOOG in terms of earnings power. The IBD top 10 list of fastest growing companies agrees with me.
Final thoughts on ARD v GOOG
Some will say that GOOG deserves a higher earnings multiple because it is a growth stock with disruptive technology. The fact is that GOOG is a growth stock and is expected to grow earnings 30% each year for the next 5 years. Even though ARD is in the energy sector it is also a growth stock. In fact ARD has the higher earning growth prospects due not only to the growth in oil and gas production but also the expected rise in commodity prices in the next 5 years.
A company like GOOG will experience challenges with it's profit margins going forward as consumers and businesses alike must evaluate and reduce budgets for advertising and the like due to challenges with rising energy costs and the negative impact on the U.S. economy. ARD on the other hand will be experiencing a rising profit margin and improving fundamentals as geopolitical events, natural disasters, and peak oil drive oil prices higher. The energy sector going forward will provide the investor the investment opportunity of a lifetime. Peak oil will be much bigger than even the internet. Consequently the bullrun in energy stocks will make the technology bullrun of the late 1990's look small in comparison.
Here are some interesting comparisons:
Profit Margin (ttm):
ARD.......38%
GOOG...24%
Operating Margin (ttm):
ARD.......61%
GOOG...33%
Return on Equity (ttm):
ARD.......22%
GOOG...21%
Price to Sales:
ARD.......23
GOOG...26
Forward PE:
ARD.......19
GOOG...53
The purchase of GOOG shares in lieu of ARD shares would cause diworsificationon in any portfolio. I"ll stick with ARD. You would be wise to do the same.
posted by -Aztec- at 3:18 AM
<< Home