Google: Rev Growth Rate, Margins to Decline With MMI, Says Barclays
With Google ( GOOG ) having won approval from the European Union today of its takeover of Motorola Mobility ( MMI ), and with U.S. antritrust approval expected later this week, Barcalys Capital's Anthony DiClemente offers his perspective on what the integration of Moto will mean to Google's financial structure. DiClemente, who has an Overweight rating on shares of Google, and a $700 target, warns that the most difficult thing for investors to swallow is that revenue growth and pre-tax profit (Ebitda) margin will be lower with the incorporation of Moto: Pro Forma for MMI we believe GOOG’s 2012E and 2013E y/y revenue growth rates could become ~16% and 15% (from 23% and 19%), respectively, 2012E/2013E PF EPS growth rates would remain relatively unchanged, and 2012E/2013E PF EPS could be $43.84/$52.40. We think the biggest optical change for investors will be EBITDA margins, which would become significantly lower for the overall company, mostly as a result of MMI’s substantial COGS expense line. As a result, GOOG’s EBITDA margins could be 40.9% in 2012 (from 55.2% pre-acquisition), however, these margins could rise to 45.2% by 2016, partially as the result of some assumed cost synergies in R&D and SG&A.

With Google (GOOG) having won approval from the European Union today of its takeover of Motorola Mobility (MMI), and with U.S. antritrust approval expected later this week, Barcalys Capital’s Anthony DiClemente offers his perspective on what the integration of Moto will mean to Google’s financial structure.

DiClemente, who has an Overweight rating on shares of Google, and a $700 target, warns that the most difficult thing for investors to swallow is that revenue growth and pre-tax profit (Ebitda) margin will be lower with the incorporation of Moto:

Pro Forma for MMI we believe GOOG’s 2012E and 2013E y/y revenue growth rates could become ~16% and 15% (from 23% and 19%), respectively, 2012E/2013E PF EPS growth rates would remain relatively unchanged, and 2012E/2013E PF EPS could be $43.84/$52.40. We think the biggest optical change for investors will be EBITDA margins, which would become significantly lower for the overall company, mostly as a result of MMI’s substantial COGS expense line. As a result, GOOG’s EBITDA margins could be 40.9% in 2012 (from 55.2% pre-acquisition), however, these margins could rise to 45.2% by 2016, partially as the result of some assumed cost synergies in R&D and SG&A.

That would make Google’s stock multiple more expensive than the current 13.8 times P/E:

As a result, our $700 price target could imply ~16.0x our post-MMI 2012 estimated PF EPS, and a ~9.5x EV/EBITDA multiple on our post-MMI 2012E EBITDA estimate of $20.1bn.

DiClemente thinks as a result of the shifts in financial structure, it’s possible investors may start to value Google on a sum-of-the-parts basis, and he offers his suggested model of such in a table:

Barclays offers its estimate for what a sum-of-the-parts valuation might look like after Google’s acquisition of Motorola Mobility is consummated.

Google shares today are up $7.15, or 1%, at $613.06.

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