A wealthy guy about to turn 58 who arranges to sell a slug of his employer’s stock to take a few eggs out of the company basket is a pretty routine bit of personal financial planning.
Yet when the guy is Google Inc. (GOOG) executive chairman Eric Schmidt, when the 42% slug of his stake that might hit the market is worth $2.5 billion and the news of the sale plan comes with the stock at an all-time high, some reflex questions pop up about whether it makes for a sell signal.
Well, it doesn’t - not by the evidence of Schmidt’s motivation, the negligible impact the sales would have on the stock or the fundamental story that lifted Google shares to a new peak above $785 before backing off to below $780 Monday.
In a regulatory filing, Schmidt detailed his intention to unload up to 3.2 million Google shares – 42% of his personal interest and about 1% of the entire company. This automatic selling plan, under which he can sell at preset intervals over the next year, was set on paper Nov. 15. Since then, Google shares are up 20%, outperforming the sizzling market rally during that time - which is a pretty decisive clue that Schmidt’s impulse to sell came with no privileged judgment about the stock being near a top. The entire amount Schmidt might sell amounts to less than two days' worth of the stock's average trading volume.
On its merits, Google has been enjoying one of its periodic bouts of rediscovery by the market as one of the best-positioned mega-cap companies in the market. Its outperformance by about 15 percentage points over the Standard & Poor’s 500 index in the past year has essentially all come since the public’s ardent fever for Apple Inc. (AAPL) shares broke in September.
Though the companies have little in common aside from a Silicon Valley home and a name ending in “-le,” they seem to occupy the same patch of the collective investor mind - the two gaudily high-priced tech stocks of companies which in the last decade have usually had their markets figured out before the rest.
Yet unlike Apple, Google is not hit-product driven. Google customers, in a steadily growing end market that Google dominates, passively pay small sums via advertisers renting their eyeballs. All Google does is grow earnings at around a 15% annual clip, convert nearly all earnings into cash and work steadily to overcome popular skepticism about unexpected but strategically vital acquisitions (first YouTube, now Motorola Mobility).
It should be a comfort to Google investors that the stock’s recent ascent to a new high has unaccompanied by lots of aggressive speculative action and hoopla. At last report, only two actively managed mutual funds were larger Google shareholders than the index-fund managers who must own the stock in proportion to its S&P 500 weighting, an encouraging sign that the shares are not over-loved by stock pickers.
The Street, too, is pretty stingy with its enthusiasm for the stock, relatively speaking. Only 65% of Google analysts rate it a Buy, according to FactSet, with 35% at a Hold. That's the lowest proportion of sell-siders recommending the stock in at least five years, another encouraging indication of muted expectations. The consensus price target for Google is just $835, a mere 6% above the current price.
Now, on a short-term basis, the fact that Google's share price has nearly caught up with the collective upside target suggests that the stock - like the entire market - has covered a lot of ground in a hurry and could use a rest or retreat. The last couple of times Google nudged up against the sell-side targets, the shares pulled back fairly sharply, but then resumed their climb before long.
Given Google's dominance in search and its YouTube video hub juggernaut, the company can afford to take the long view about extending its franchise, as it's doing in browsers, social-networking and mobile communications. These pursuits qualify as possible bonus "kickers" to growth and the stock's value, given that the profits from the core business fully support the stock's valuation.
Google trades for 13-times enterprise value (stock-market value minus net cash) to cash flow (earnings before interest, taxes, depreciation and amortization). That's a couple of multiple points ahead of the huge media companies that also depend on advertising, yet a good deal less expensive than other global, electronic "network-effect" companies such as eBay Inc. (EBAY) and payment processors Visa Inc. (V) and MasterCard International (MA).
In all it suggests that investors shouldn't be scared off by the chairman's decision to part with a bunch of his shares, but in fact might want to bid for some of their own.