An irreverent look at Wall Street
BAC:Expect 3Q revenue upside, spending will keep EPS in check Based on constructive comments from US/European advertisers and eCommerce consultants, plus a currency benefit, we anticipate revenue modestly above Street estimates for $5.25bn, and in-line with rising expectations for +5% q/q growth (around $5.33bn). However, we expect higher opex spending from aggressive hiring, marketing and acquisitions will keep EPS close to street estimates, near $6.67. With the stock up 13% since Sept 15th, a similar set-up to last quarter, we are not anticipating a big positive move on 3Q results.Spending continues, street should see it coming ␣ Google integrated seven acquisitions in 3Q and given current platform investment mentality, we would not be surprised if q/q OPEX growth was near $140mn (vs. about $90mn per street), offsetting some revenue upside. We anticipate EBITDAmargins declining 400pbs y/y for 3Q, but the positive is that Google should deliver double-digit EPS growth even with additional investment.We think bulls will get half of what they are looking forWe think the street’s two biggest concerns are stability of core growth and margin pressure, so results that suggest core search is maintaining strong growth or commentary that investment growth is peaking would be positives. We think paid search initiatives (see page 7) will help support strong core search growth, although we don’t expect much help much with margin pressure. Any incremental disclosure on display, mobile or Google Instant traction could be well received.Long-term risk/reward attractiveStock trades near 16x our 2012E EPS, and 13x excluding $90/share in expected 2010 year-end cash. Our $640 price objective is based on 16x 2012E ex-interest EPS of $34.33, plus $90/share in cash. We see a downside case of 15x 2011E EPS (12x ex-cash) or $460 and an upside case of 20x 2012E EPS or $685.
StifelGoogle is scheduled to report earnings on Thursday, 10/14 AMC. We have increased our 3Q EPS estimate to $6.88 (consensus $6.67) and have maintained our Buy rating. Checks indicate a better September than we had originally anticipated, with Google gaining share of total search budgets. Other positive factors include foreign exchange and affiliate deal resets with NWS (MySpace) and AOL, which will both improve profitability and accentuate growth in net revenues, all else being equal. We forecast margins will be flat-to-down slightly from 2Q levels.Estimates: We are increasing our revenue estimates due to a strong September in the U.S. and ROW markets, and a weakening U.S. dollar during the quarter. Our q/q net revenue growth estimate increases 120bp from +4.8% to +6.0%, or $5.40bn, well above the consensus view. Our EBITDA increases to $3.19bn from $3.16bn, while our margin remains roughly the same at 59%. PF EPS is $6.88 vs. $6.81 prior.Valuation: We have increased our target to $600 from $560 as the stronger growth in EPS, FCF and EBITDA, as well as a generally positive tone, should translate into investor enthusiasm over the near term. Our target price is based on a blended approach using GAAP and PF EPS, EBITDA, and free cash flow. Maintain Buy rating.Risks to Investment: The biggest risk to earnings is the impact on margins of aggressive hiring practices and acquisitions. Other risks include the increasing relevance of the Microsoft/Yahoo! partnership, the popularity of social and mobile media, which could draw Google users away from the directly navigated search behavior today, and broad macro economic concerns
thank you as always
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