Facebook Inc (NASDAQ:FB) stock jumped during regular trading hours on Monday, climbing 4.06% to close at $121.77 after the company said on Friday that its board had approved $6 billion worth of share repurchase. The rally was sorely needed, as some analysts noted that Facebook Inc (NASDAQ:FB)’s valuation multiples were close to record lows.
Facebook (FB) stock rallies on repurchases
Investors rewarded Facebook Inc (NASDAQ:FB) for the massive share repurchase authorization, which is set to begin in the first quarter. The $6 billion authorization is nearly 2% of the company’s market capitalization, and JPMorgan analysts see it as a bullish sign that comes at an apt time. Facebook Inc (NASDAQ:FB) sounded notes of caution on its revenue growth around its earnings report earlier this month. Also the company said it was ramping up investing spending and dealing with headlines about fake news circulating on its network and misstated ad metrics.
JPMorgan analysts believe the board’s $6 billion authorization is entirely separate from the company’s funding the withholding of employee taxes on stock awards via a net share settlement. Management discussed this move during the third quarter earnings call.
Buy Facebook (FB) stock on the pullback, say analysts
The JPMorgan team likes the company’s valuation following a rough few weeks since the last earnings report. As a result, they’re buyers on the pullback in Facebook Inc (NASDAQ:FB) stock that occurred in the weeks right after the report. They note that the social network posted strong numbers and expanded its margins but that investors are concerned because they don’t believe management’s cautionary comments are baked into the Street’s estimates for 2017.
Nomura Instinet analyst Anthony DiClemente also liked the company’s valuation due to the recent pullback in its shares. He said in his Nov. 21 research note that the share repurchase program should buoy investor confidence despite the headlines that have been pummeling Facebook Inc (NASDAQ:FB) stock. He noted that the stock was trading at its lowest level in three years and called the timing of the share buyback program “encouragingly pragmatic.”
He pointed to Alphabet as an example of another company that restored investor confidence in allocation of its resources and said that the share repurchase program should serve to reassure investors that management’s heavy investment plans for next year were not put in place instead of other options for creating value. He added that the $6 billion authorization appears similar to Alphabets when looking at percentage of free cash flow but a little more aggressive in terms of a percentage of the company’s $29 billion cash balance.
What does Facebook’s (FB) share purchase mean in numbers?
Deutsche Bank analyst Lloyd Walmsley also praised the share repurchase plan and ran the numbers. If Facebook Inc (NASDAQ:FB) completed the entire $6 billion authorization at $117 per share – which was close to where the stock was trading before today’s rally – Walmsley estimates that it would be 1.5% accretive to the company’s earnings per share in 2017 and 2018. That assumes a 1% return on cash. Of course it’s far more likely that Facebook Inc (NASDAQ:FB) will space the purchases out.
He added that the $6 billion authorization amounts to about 23% of cash and equivalents as of the third quarter and 44% of his estimated free cash flow for 2017. He added that this suggests the authorization may expand at some point.