Why Google's EPS Growth Is About to Accelerate

People are underestimating how bad the Motorola acquisition has been. When it comes off the books, earnings will jump dramatically.

Feb 4, 2014 at 3:30PM

Have you ever heard the story of a man who was hitting his hand with a hammer? When his friend asked why he was doing something so ridiculous, he replied "because it feels so good when I stop." This may be how shareholders will feel when Google's (NASDAQ:GOOGL) sale of Motorola is finalized. Motorola was a disastrous acquisition, and the share price is likely to go up as a result of the sale.

Google recently announced that it is selling Motorola Mobility for $2.91 billion, a fraction of the $12.5 billion paid when the company was acquired less than 18 months ago according to company press releases.Essentially, Google bought a patent portfolio and stripped out the operating components. Just how much shareholder value did this escapade destroy?

Motorola contributed $865 million
The loss associated with the purchase and sale of Motorola is really closer to $6.3 billion, rather than the $9.1 billion that the headlines would make you believe. When Google announced the acquisition of Motorola in August 2011, the target had net cash of $865 million. Other numbers seen in the press don't include the liabilities to Motorola's distribution channel, as this isn't a discretionary expense. The channel always gets paid. This brings the cost down to $11.6 billion.

Cablebox business added $2.9 billion
Google restructured Motorola to keep only the handset business and patent portfolio by selling the Home business (cable boxes) to Arris for $2.4 billion in cash and stock. By adding back the sale price of the handset business for $2.9 billion, the total cost of the patent portfolio was $6.3 billion.  

Operating losses consumed $2.4 billion
This seems like a high price tag for a series of patents, but this doesn't include the operating losses that Google incurred during the time that it held Motorola. Motorola never contributed operating income to Google. In fact, it incurred another $2.4 billion in losses over the last seven quarters. This brings the price tag to $8.7 billion for those patents, which, after taxes, amount to $18.50 in profits per share.

This is outrageous and infuriating. This is going to make the share price go up. On Wall Street, the absence of pain causes earnings to grow faster, and that's what makes share prices appreciate: unexpected accelerations in profit growth.

Looking at the last seven quarters of Google's operating profit, both with Motorola included and backed out, its easy to see the business was losing money, but that loss was accelerating each quarter. When this is off the books, Google shareholders will be in for a big treat: accelerating earnings growth.


Divesting handsets adds over a buck a quarter to EPS
Even though Google destroyed value for seven quarters and cost shareholders $8.7 billion dollars, the share price will benefit from the lack of earnings drag once Motorola is removed. Excluding the $507 million loss in the most recent quarter, profits would have been $1.22 per share higher at Google's blended tax rate.

While shareholders should be upset about the misuse of capital, the bulls' cheers over stronger than expected earnings will drown out the bears' grumbling.  The strength of Google's core business masked how poorly this acquisition has performed and when the deal closes with Lenovo we are likely to see a one time acceleration in earnings growth if management lets the added profit fall to the bottom line rather than spend it on pet projects.

This is our top stock for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

David Eller has no position in any stocks mentioned. The Motley Fool recommends Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers