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Bank Of America (BAC) Says Google Inc. (GOOG) Is Going To $920 – Can It Get There?

 February 27, 2013 03:21 PM

(By Rich Bieglmeier) Google Inc. (GOOG) was upgraded today by Bank of America (BAC) to a "buy" rating from "neutral". The upgrade comes with a new price-target of $920, 16.4% higher than their previous $790 target – better late than never.

Shares of the search giant are up $12.26 (1.55%) as we type.

Let's see what it would take for the mighty Google to click its way to $920. Analysts believe the NASDAQ 100 member will earn $45.52 in 2013 earnings-per-share. That means Google will have to trade at 20.21 times earnings. Meanwhile, Wall Street's 2013 estimate reflects a 14.30% increase over 2012's final number. A P/E of 20 suggests that Google will need to trade at a 41% premium to projected profit growth.

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The good news for Bank of America's call is that Google has traded as high as 41.81 times earnings in the last five-years with an average P/E of 24.95, which would put $1,133 in play. At the same time, EPS grew at an average pace of 20.59 for the past five years, meaning Google tends to trade at a 21% premium to growth. The bad news for BAC's view is that Google needs to double up on the average premium to hit the target. In fact, the average premium nets out to a P/E of 17.3 and, using 2013's estimate, a price target of $785. Did we just say Google is overvalued currently?

Another metric iStock likes, and Ken Fisher of money management and Forbes fame likes too, is price-to-sales (P/S). Now, Mr. Fisher apparently likes P/S sales ratios of 1 or less. We, too, like to see similar ratios, but, perhaps, aren't as stringent. Instead, we like to look at current valuations relative to the company's past.

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Much like support and resistance levels on stock charts, many companies trade within historical ranges. Investors might be well served by monitoring valuation guardrails. Our experience shows they tend to be reliable gauges until they are broken one way or the other. Once they are broken, never, EVER, get caught up in the thought "that it can't go any lower/higher than this."

For 2013, Wall Street thinks Google will earn a little more than $61 billion. Using BAC's $920 price target and Yahoo Finance's 329.66 million shares out for GOOG, we come up with a $303.28 billion market-cap for the AdSense company. Toss all the numbers in the excel blender and a P/S ratio of 4.97 spits out in the results column.

At the moment, Google's P/S ratio is 5.307 and the five-year average P/S is 6.171. If GOOG traded at the five-year average price-to-sales ratio, the stock would trade at $1,142 – fairly close to the average 24.95 TTM P/E price of $1,133 calculated up top – not the average premium 17.3 P/E iStock calculated, which resulted in the $785 price.

Based on these two metrics, P/E and P/S, Google Inc. (GOOG) should trade between $785 and $1,142 in the next 12 months. Split the difference down the middle and we get a price target of $963.50; not too far from Bank of America's $920.



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