Thursday, March 27, 2014

Analysis of Mercadolibre Inc (listed on the NASDAQ)

“There are several types of men in this world…There are men who dream and never make it off their couch. There are men who dream and fail. And then there are men who dream and change the landscape of this world.” — Bray Wyatt, WWE wrestler

Please read the disclaimer here: Enjoy the article, bitches!

I hope you guys/gals have been keeping it real, making money and fucking bitches/manwhores. Anyway, today I will be analysing Mercadolibre which I think is a really interesting Latin American-based company. Mercadolibre provides e-commerce services such as online marketplace, advertising, payments solution and online stores solution. While the company operates mainly in Latin America, it was incorporated in Delaware, United States. The stock trades on the NASDAQ and closed at USD 94.71 per share on Thursday. I recently took a position in Mercadolibre.

Mercadolibre has returns on capital that are as hot as a burrito stuffed with jalapeño peppers (yes, I know my attempts at humour are lame). The company achieved return on equity (ROE) and return on assets (ROA) of 37.12% and 21.95% respectively in 2013. The company’s ROE and ROA are even more impressive if you consider that a large portion of the company’s assets consist of cash, cash equivalents & investments. Mercadolibre had $262.59 million in cash, cash equivalents & investments as at December 31, 2013; the company only had total assets of $592.36 million. An asset-light business model is particularly awesome for a company in the growth stage as it can increase profits very rapidly and create a ton of shareholder value by reinvesting in the business. Equity capital employed in the business grew from $93.42 million at the end of 2008 to $343.48 million at the end of 2013. Profit before tax grew from $29.44 million to $163.10 million in the same period. This would result in a pre-tax return on incremental equity capital of 53.45%; returns on capital like that would make any value investor wet/hard. Yes, I’m aware that not all of the increase in equity capital may be used to grow the business or that not all the increase in profits is a result of additional capital being applied to the business. But whatever, you get what I’m trying to say.

For the 5-year period of 2009-2013, Mercadolibre experienced net revenue and profit before tax growth of 28.10% and 40.83% respectively which is super awesome. The company grew net revenue and profit before tax at 26.49% and 16.32% respectively for the year ended December 31, 2013. As Mercadolibre is a growth stock, it will naturally have a high price/earnings ratio. To help me decide whether the company is overvalued or undervalued, I will use the following formula pioneered by Benjamin Graham: Intrinsic value = (8.5 + 2 x earnings growth over the next 7 to 10 years) x earnings per share. You can read more about the formula in this Wall Street Journal article. While I can’t accurately predict the company’s growth rate, I can rearrange the formula to find out how fast the company needs to grow for it to deserve its current stock price. Let’s get down and dirty with algebra:

94.71 = (8.5 + 2 x G) x 2.66
94.71/2.66 = 8.5 + 2 x G
35.60 - 8.5 = 2 x G
27.1/2 = G
G = 13.55%

Note: G represents growth and 2.66 is the earnings per share

So, the company needs to be able to grow earnings by a compounded annual rate of 13.55% for the next 7-10 years for you to get a fair shake at the stock’s current price. According to this article here, Forrester estimates that online retail in Brazil, Argentina and Mexico are set to more than double from almost $20 billion in 2013 to $47 billion in 2018.” This combined with Mercadolibre’s recent strong growth makes me think that it’s possible for the company to grow at a compounded annual rate of 13.55% over the next 7-10 years.  

The following is the breakdown of Mercadolibre’s 2013 net revenue by geography:


Overall, I think that Mercadolibre is an excellent business with a reasonable price. Sure, the stock may fluctuate in the future but I think it will do alright in the long-term. If the stock falls in the future, then I may take the opportunity to add to my position assuming that the company’s business fundamentals remain intact. After all, if I think that I’m getting a fair deal at $97 per share (the price I paid for the stock), then I should be getting an even better deal at $85 per share. Make Mr. Market your bitch, don’t let him make you his bitch.

Before I conclude this article, here’s a quick update on the Greedy Dragon portfolio. Other than Mercadolibre, I took a position in Banco de Chile and Tifa Finance. If you read my Risk management series: Foreign exchange risk article, you would know that I recently sold shares in Tifa Finance. I sold the shares because I thought they reached fair value and I wanted to increase my cash holdings, but I think Tifa Finance is undervalued now so I’m investing in it again. I won’t take any credit for my previous decision to sell Tifa Finance as I don’t believe in market timing; I will just chalk it up to luck being on my side this time around. Anyway, thank you for reading. Take care and stay rational.

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