Google Snubbed, Lennar Added to the S&P 500

With Gillette being bought out by Procter & Gamble, there’s a big opening in the S&P 500. Many market observers thought that Google would be tapped to move into the index. However, the folks at McGraw Hill decided to go with the homebuilder Lennar instead.
Even though Google has a much larger market cap ($88 billion for Google to $9 billion for Lennar), Lennar is a much better representation of the overall economy. Lennar has nearly four times as many employees (12,000 to 3,000), and Lennar will generate more sales this year ($14 billion to $4 billion).
I’m also happy to see Lennar get selected because it’s been public much longer than Google. Lennar started trading on the market over 30 years ago, while Google hit the market last year.
Why was Google snubbed? I think it’s because Google is overpriced and more and more people are realizing it. For example, Professor Aswath Damodaran at NYU has run the numbers on Google, and he thinks its worth just $113. Click here for his analysis. (Warning: link contains math). The last thing the index keepers at McGraw Hill want is to add a company that immediately plunges. I think Lennar is overpriced, but it has a lot more going for it than Google.
Google will report its earnings at the end of this month. The market currently expects earnings of $1.35 a share. However, I think the more important number to watch is the estimate for next year’s earnings. Wall Street currently expects Google to earn $7.30 a share next year. But this number has actually been heading down slightly over the past few weeks. This means that Google is trading at over 43 times next year’s earnings. For comparison, General Electric is going for 16 times next year’s earnings and Citigroup is trading at about 10 times next year’s profits. Yes, Google should be given a premium for its growth, but there’s no way to justify a premium that high.
Google is headed for a fall and McGraw Hill knows it. Of course, some people still love Google.

Posted by on October 3rd, 2005 at 9:51 am


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