Baidu On Sale!

By Chad Henage - January 11, 2012 | Tickers: BIDU, GOOG | 0 Comments

• Email
• Print

If someone came to you and said, "I know of a stock, it's about as cheap as it's been in months. It also commands a huge lead in search in its country. Oh, and did I mention it has been growing earnings at over 80% and is expected to grow at 40+% in the next five years. One more thing, the country it dominates search only has a third of its population online ... and it's the most populous country in the world. Interested?"

If this sounds like a stock you would want to buy, welcome to Baidu (NASDAQ: BIDU). Baidu is the dominant search provider in China, only a third of China is online and Baidu is also beginning to make inroads with cell phones in collaboration with Dell. Here is the part that's the most unbelievable. The stock is cheap. Yes, I said it, Baidu is cheap. Look at the numbers and you tell me what looks expensive here:

BIDU - $127.34 current price on 1/11/12
Projected 2012 P/E - 28.94
Projected five-year earnings growth rate - 48.10%
PEG using these assumptions: 0.60
% off 52-week high: -23.27%
PEG+Y: 1.66

First we do have to set some assumptions. We are assuming that people buy stocks based on future earnings. That certainly seems reasonable, after all why do we care what the company used to earn if we didn't already buy it? Second, we are assuming that the projected future growth rate is reasonable. Does this hold true? Well 48.10% growth seems very high, but let's examine this in light of past growth. If Baidu has been growing earnings at over 80%, then does a slowdown in growth to 48.1% seem like a lot? This represents a nearly 40% decline in growth over the next five years. This seems like a big slowdown.

The amount off its 52-week high is a stated fact and can't be debated. This company is selling at a just over 23% discount from its highest point in the last year. The PEG+Y is a measurement that Peter Lynch used in his calculations; it helps to compare companies that pay dividends with those that don't. It's basically: Growth Rate % + Dividend % / Divided by P/E and then multiple the figure times 100. So in Baidu's case it's (48.1 + 0 / 28.94) * 100 = 1.66.

In Lynch's words, you're looking for something above 1.5, but you really want 2.0 or better. He further says that if you can find a 3.0 that is sustainable, buy all you can. Well Baidu doesn't quite get us to a 2.0 but it's not bad at 1.66. Just for a point of comparision Google (NASDAQ: GOOG) has a PEG+Y of 1.34. In plain English, Baidu is a better value then Google using this measure.

So now that we've run through the numbers, why is it on sale? Well let's say that Baidu had the same PEG as, say, McDonald's. Now certainly this is a cross-industry comparision, but just for kicks McDonald's carries a PEG of 1.75. If Baidu carried the same PEG, its current price would jump to $369.50, an increase of more than 190% from current prices.

Granted, we might be stretching a bit to say that Baidu should command the same premium as McDonald's, but what about a company a little closer in comparision like Google. Baidu and Google are basically in the same industry in two different countries. Now we can split hairs and say that Google is into other areas, but the basic business of search is the same. If Google sells for a PEG of 0.75 and Baidu sells at a PEG of 0.60 (both based on 2012 projected earnings), then Baidu should be selling at $158.70. The interesting part is Baidu is in a country that is growing faster and has a much lower percentage of the population online.

If you think that Baidu is cheap or just want to find out more about it, I would suggest adding it to your watch list on Motley Fool to keep up with developments.

• Email
• Print
• Feedback