More Digging Through the Remains of Earnings Season

By Matthew DiLallo - May 14, 2012 | Tickers: CSCO, EBAY, LOGI, MELI, PLCM | 0 Comments

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With earnings season starting to wind down I’ve been sifting through the rubble of companies that saw their stock prices crushed in the wake of their reported earnings.  There are times that the market is being too short sighted and missing the potential that lies ahead.  I, on the other hand, tend to look to hold stocks for years and if a company I would like to own more of suddenly goes on sale I get interested.  First however, I need to make sure the business isn’t simply busted and that the long term thesis is indeed intact. 

South American online auction site MercadoLibre (NASDAQ: MELI) is down about eighteen percent the past three months with a bulk of those losses coming after reporting earnings that disappointed the street.  On the surface it wasn’t that bad of a report, they actually met earnings estimates of $0.45 cents a share but missed on revenue with $83.7 million against expectations of $84.3 million.  The problem for some investors is that MecadoLibre’s growth might be slowing just a touch which makes it harder to justify its hefty valuation.  Still the eBay (NASDAQ: EBAY) of Latin America is expected to grow earnings by 30% each of the next two years which, given it's a current P/E ratio of about 44 times, has it trading at about one and a half times growth.  To put this into perspective, eBay is expected to grow earnings by about 17% which is right in line with its P/E ratio, pricing it at just one times growth.  MercadoLibre is not cheap but for a company growing nearly twice as fast as its nearest comparable in a massive addressable market, it certainly makes for a great long term story.  The fact that eBay is a partner and part owner and not a direct competitor gives them a competitive edge as they can focus on execution instead of looking over their shoulder.  I think long term investors will be greatly rewarded as MercadoLibre continues to grow.

The same cannot be said for video-conferencing specialist Polycom (NASDAQ: PLCM) which down about forty percent the past three months after experiencing weakness in its North American business which only managed to grow revenue by two percent.  They have been under pressure from the likes of Cisco’s (NASDAQ: CSCO) Tandburg unit and Logitech’s (NASDAQ: LOGI) LifeSize business among others.  This has caused revenue growth, earnings and margins to all shrink.  What I find most noteworthy is that after their 4^th quarter earnings where they crushed estimates it appeared that they were winning business from Cisco who has been working to integrate their purchase of Tandberg and now that might have just been a blip.  Also unlike MercadoLibre, Polycom is now dirt cheap by most metrics and has an exceptional balance sheet with over $3 of net cash.   The question that needs to be answered is if competition from Lifesize and Tandberg will keep their earnings permanently compressed. With such a compelling valuation and balance sheet, the downside risk does seem limited as they make for an interesting target for a would be acquirer.  That being said, I'd like to see another quarter to ensure their business isn't deteriorating under competitive pressures. 

Of the two, I am more interested in MercadoLibre at the moment as their market potential is enormous and eBay is a partner, not a competitor.  Polycom could make a nice buyout candidate for a Private Equity shop or possibly even Cisco.  With Cisco’s bulked up presence in the field and many other competitors like Logitech, it has a much bigger hole to dig out of. 

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