MercadoLibre - Not as Expensive as you Think
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
MercadoLibre (NASDAQ: MELI) caught my attention sometime late last year. I was using the Motley Fool CAPS Stock Screener and found this one. The screen I was using is something I use a lot -- I wanted companies that had increased their earnings at least 20% in the last few years and paid a dividend. I owned the stock late last year, then it sold as part of a covered call option being exercised. I haven't bought back in because I thought the stock was a little too expensive. What I found is if you look beyond reported earnings per share, MercadoLibre is actually cheaper than you think.
At its current price of about $100.62, the stock sells for a forward P/E of 43.56. With growth expected in the next few years at 28.53%, on the surface the stock doesn't look like that great of a deal. I start to get skeptical of stocks once their forward PEG ratio goes above 1.5 and currently MercadoLibre is at 1.53. The company does pay a small dividend, which is somewhat unusual with a fast growth company. When you consider that their U.S. counterpart, eBay (NASDAQ: EBAY), sells for about $36.60, has a forward P/E of 15.98 and is expected to grow at about 12.53%, eBay on a PEG basis looks cheaper. There are a lot of differences between the two companies other than their expected growth rates.
If you have the choice between a company with a 28.5% growth rate and a company with a 12.5% growth rate, you normally are better off with the 28.5% company. Even if its stock seems slightly overpriced the faster earnings will shrink the multiple faster. There are a few reasons it seems to me that MercadoLibre might be cheaper than most people think right now.
First, the company's prior growth rate in earnings is 94.75%. Though we don't have a guarantee that the company can continue this torrid pace, it shows how huge this company's prior growth has been. That being said, a slowdown of nearly 70% in their pace of growth seems like analysts are hedging their bets a bit too much. With nearly 34% top line growth expected in full year 2012 and nearly 33% in 2013 I don't see how this company would only show 28.5% earnings growth.
Second, MercadoLibre has a history of beating expectations. The company has beaten analyst estimates two of the last four quarters and their average for the year is a beat of 6.1%. This tells us that their earnings might come in as much as 6% above estimates.
Third, and the most significant, is MercadoLibre's truly remarkable free cash flow. I use a calculation of free cash flow per $1 of assets for the last four quarters when comparing companies. This evens out quarterly fluctuations, and makes comparing different size companies a more apples-to-apples approach. Looking at MercadoLibre, they have generated $0.21 of free cash flow for every $1 of assets in the last year. Just to give you context, eBay has generated $0.0845 per $1 of assets. Think about that for a minute, MercadoLibre is generating free cash flow at nearly 150% of the rate that eBay generates. This is a game changing statistic for me. eBay has a premium between their cash flow and P/E ratio of about 31%. MercadoLibre only has a premium of cash flow versus P/E of 8.7%. If MercadoLibre were valued at the same cash flow to P/E premium that eBay had, the stock would sell for about $116. I think we can rightfully believe that MercadoLibre deserves a greater premium because they are generating 150% more free cash flow than eBay. Even at $116, MercadoLibre would be 16% undervalued compared their their U. S. counterpart.
I don't think that the market appreciates the amount of free cash flow that MercadoLibre is generating. I know I didn't until I ran these numbers. Even after its recent run up, this high amount of free cash flow being generated gives me the confidence to give MELI a green thumbs-up on my CAPS page. Let me know what you think in the comments section below.
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