One of the stocks that is not included in our deep value Stock Screeners is Facebook Inc (NASDAQ:FB).
Facebook Inc (FB) is the world’s largest online social network. Its products are Facebook, Instagram, Messenger, WhatsApp, and Oculus. Its products enable people to connect and share through mobile devices and personal computers.
A quick look at Facebook’s share price history over the past twelve months shows that the price is up 36%, but here’s why the company remains overvalued.
At the end of last week, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. The chat spanned many different topics, Read More
The following data is from the company’s latest financial statements, dated June 2017.
The company’s latest balance sheet shows that Facebook Inc (FB) has $35.452 Billion in total cash and cash equivalents. Further down the balance sheet we can see that the company has $0 Billion in total debt. Therefore, Facebook has a net cash position of $35.452 Billion (cash minus debt).
If we consider that Facebook Inc (FB) currently has a market cap of $489.967 Billion, when we subtract the net cash totaling $35.452 Billion that equates to an Enterprise Value of $454.515 Billion.
If we move over to the company’s latest income statements we can see that Facebook Inc (FB) has $15.401 Billion in trailing twelve month operating earnings which means that the company is currently trading on an Acquirer’s Multiple of 30, or 30 times operating earnings. With the average acquirer’s multiple in our Large Cap 1000 Stock Screener being 7.4 that places Facebook squarely in overvalued territory.
The Acquirer’s Multiple is defined as:
Enterprise Value/Operating Earnings*
*We make adjustments to operating earnings by constructing an operating earnings figure from the top of the income statement down, where EBIT and EBITDA are constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that these earnings are related only to operations.
It’s also important to note that if we take a look at the company’s latest cash flow statements we can see that Facebook generated trailing twelve month operating cash flow of $19.384 Billion and had $5.079 Billion in Capex. That equates to $14.305 Billion in trailing twelve month free cash flow, or a FCF/EV Yield of just 3%.
The company has done a great job in terms of its annualized Return on Equity (ROE) for the quarter ending June 2017. A quick calculation shows that the company had $62.188 Billion in equity for the quarter ending March 2017 and $66.481 Billion for the quarter ending June 2017. If we divide that number by two we get $64.334 Billion. If we consider that the company has $13.610 Billion (ttm) in net income, that equates to an annualized Return on Equity (ROE) for the quarter ending June 2017 of 21%.
There is no question that Facebook is at the top of its game with current revenues of $33.173 Billion (ttm) and net income of $13.155 Billion (ttm) at historical highs, as is the company’s book value per share of $22.89 (ttm). The issue however is the company’s current valuation. Facebook is trading on a P/E of 38, a P/B of 7.4, and a P/S of 15.1. If we invert the P/E of 38 that means that Apple provides an earnings yield of 2.6%. The company has a FCF/EV Yield of 3% (ttm) and an Acquirer’s Multiple of 30, or 30 times operating earnings. All of which indicates that Facebook is overvalued.
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Over a full sixteen-and-one-half year period from January 2, 1999 to July 26, 2016., the All Investable stock screener generated a total return of 5,705 percent, or a compound growth rate (CAGR) of 25.9 percent per year. This compared favorably with the Russell 3000 TR, which returned a cumulative total of 265 percent, or 5.7 percent compound.
Article by Johnny Hopkins, The Acquirer’s Multiple