Balance sheet buoys Google

Your Money

November 26, 2006|By Andrew Leckey | Andrew Leckey,Tribune Media Services

I love Google Inc., but I wonder how long its stock can keep climbing?

- S.L., via the Internet

It all depends on how successful it is at branching out from its outrageously profitable business of selling online advertising tied to its flagship search engine.

Even though "Googled" has become a household word, some are skeptical about whether such dominance can be transferred to newer products.

It also has a lot of wealthy employees who benefited greatly from its initial public offering and may not hang around much longer.

This 8-year-old firm is No. 1 among search engines, recently holding about half the U.S. search market. Advertising revenue, always closely monitored for indication of slippage, accounted for 60 percent of Google's revenue in its most recent quarter.

It is especially adept at making rival Yahoo Inc., which runs the Internet's second-largest advertising network, look really bad. Net income in Google's third quarter nearly doubled, due in part to rising international sales. Yahoo's declined 37 percent.

Google stock broke through $500 last week; it went public in August 2004 at $85 a share.

In a bold move, it is paying $1.65 billion in stock to buy popular video-sharing site YouTube Inc., which Google chief executive Eric Schmidt considers "the next step in the evolution of the Internet." YouTube has a worldwide audience of 72 million and shows 100 million video clips each day.

Yet critics warn that the large amount of copyrighted material on YouTube eventually could open Google to an avalanche of infringement lawsuits.

Ever aggressive, Google last year spent $130.5 million to buy 15 small companies. It is adding 500 employees at its European headquarters in Ireland. It has a crack technical staff, Internet advertising is booming, and all its businesses have logical connections.

Nonetheless, its blogging and Google Finance operations haven't been as successful as other ventures, and some doubt whether its Google Earth digital mapping software will contribute to its bottom line.

Buoyed by a solid balance sheet and $10 billion in cash, however, there is optimism that Google will be able to successfully branch out. Wall Street consensus on Google is a "buy," according to Thomson Financial. That consists of a dozen "strong buys," 21 "buys," three "holds, two "under performs," and one "sell."

Google's earnings are expected to increase 81 percent this year, compared with the 7 percent rise predicted for the Internet information-provider industry. Next year's forecast of a 33 percent gain compares with 25 percent projected industrywide. The expected five-year annualized return is 32 percent versus the 13 percent forecast for its peers.

Please give your opinion of the Homestead Value Fund.

- K.C., via the Internet

Solid, experienced managers and a low expense ratio is a strong combination.

This fund holds companies ranging in size from small to giant. But its hefty portion of mid-cap stocks in recent years wouldn't make it a good idea if you already held a lot of mid-caps.

The $607 million Homestead Value Fund is up 18 percent over the past 12 months to rank at the midpoint of large value funds. Its three-year annualized return of 17 percent puts it in the top 9 percent of its peers.

"It would be hard to go wrong with this fund, since the fact it doesn't trade a lot makes it tax efficient," said Lawrence Jones, analyst with Morningstar Inc. in Chicago. "We rank its managers and their process as pretty solid."

Peter Morris and Stuart Teach have been portfolio managers since its inception in 1990, joined by Mark Ashton in 1999. Like most value managers, they search diligently for stocks with solid fundamentals but which have penalized by short-term bad news.

It's not perfect. It stumbled a bit recently with some of its energy holdings because that sector experienced problems.

"Homestead Value bought Southwest Airlines 10 years ago and continues to hold on, despite it being beaten up a bit by higher fuel costs recently, because they feel the management team is disciplined and the company is well run," Jones said. "There's a long-term orientation."

One-fourth of fund assets is in financial services, with other significant concentrations in energy, health care and industrial materials. Largest holdings were recently Wendy's International, Marathon Oil, JPMorgan Chase, Bank of America, Schering-Plough, Flowserve, Bristol-Myers Squibb, Abbott Laboratories, Genworth Financial and Parker Hannifin.

This "no-load" (no sales charge) fund requires a $500 minimum initial investment and has an annual expense ratio of 0.76 percent.

I have heard the term "market weighted" used many times in discussing stock indexes. What exactly does that mean?

- K.J., via the Internet

There's a blur of indexes out there. They differ not only in the types and numbers of stocks included, but in the way each index is computed.

A market-weighted index takes into account the price of each stock multiplied by the number of shares outstanding, while a price-weighted index considers only the stock price.

Because larger firms account for a greater portion of a market-weighted index, they have more impact on its movement. Examples include the Standard & Poor's 500 index, the Nasdaq composite index, the Wilshire 5000 Equity Index and the Hang Seng index.

On the other hand, the Dow Jones industrial average of 30 blue-chip stocks is a price-weighted index in which each stock is simply included in proportion to its quoted price.

Because market capitalization is not taken into account, a smaller company's stock can drive up the overall index just as much as a larger one. With no perfect index that absolutely does it all, most experts pay attention to several indexes that best monitor their own interests, taking the inherent differences into account.

Andrew Leckey writes for Tribune Media Services.

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