Monday, February 12, 2007

Calls of Note Part 7

- RBC Capital is out with an interesting note saying investors often ask where Google (NASDAQ:GOOG) shares become a "must-buy" from a valuation perspective. A recent regression analysis highlights a surprising truth " Google's multiple of forward earnings has been steady at 31x adjusted EPS, plus cash, for more than two years. Today, at $462 per share, Google's multiple offers only a 3% discount to the average multiple, not yet at "must-buy" levels. However, with continued growth in earnings highly likely over the next year, a pullback to the $418-$445 range would place GOOG shares into "must- buy" territory, compelling for traders and investors alike.

Despite an 11% pullback from all-time highs, shares of GOOG are no cheaper today than they were 5 months ago, when assessing valuation as a function of the prevailing forward 12-month EPS in each period.

At 29.9x FTM EPS, GOOG is only 3% below its average historical P/E of 31x. A pullback to the $418-$445 range, however, would place GOOG at one standard deviation below its mean multiple, a level seen only 12% of the time. Firm believes investors and traders alike would find shares attractive at that level. For longer-term investors, GOOG shares should be no lower than $524 by this time next year. As long as growth remains high, time is on the side of longer-term investors.

Maintains Outperform.

Notablecalls: Not actionable but good to know category.

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