Fresh Off its New Partnership, Is Baidu a Good Investment?
A few weeks ago, we discussed Google’s (NASDAQ: GOOG) acquisition of Frommer’s, which is expected to expand the tech giant’s footprint in the travel search industry. This move, coupled with the company’s earlier purchases of Zagat and ITA Software, has proven that Google is moving beyond its basic search engine services. Interestingly, Baidu (NASDAQ: BIDU), the largest search provider in China, has proven that it too is willing to venture into this arena. On July 24th, it was announced that the company had formed a partnership with Skyscanner, a Scotland-based website that receives more than 14 million unique visitors each month. While it is assumed that flight data will be integrated with Baidu’s existing search engine, it is worth noting that Skyscanner has a moderately successful mobile app to its name as well.
This news comes on the heels of Baidu’s very impressive second quarter results, in which the company reported year-over-year revenue growth of 60% and YOY earnings growth of 70%. With an EPS of $1.24, Baidu beat the Street’s estimates ($1.12) quite handily, placing it on track to reach year-end earnings targets. Specifically, analysts are predicting that Baidu will finish 2012 with earnings of $4.69 a share, up 55.4% from the $3.02 it reported last year. By the end of 2013, these estimates rise another 37.2% to $6.44 a share. On an annual basis, BIDU sports a two-year expected EPS growth (56.6%) higher than GOOG (20.8%), Sohu.com (NASDAQ: SOHU) at -16.5%, and SINA Corp (NASDAQ: SINA) at -3.6%.
It’s worth mentioning that Baidu’s projected EPS growth is below historical levels, in which bottom line expansion has averaged 84.6% a year post-recession. This has been greater than the Internet content and information industry’s average (35.4%), and peers like GOOG (30.8%), SOHU (-1.1%), and SINA. Now, this growth could not have been achieved without the company’s excellent efficiency, in which operating (51.3%) and net (46.8%) margins are far above industry norms (23.8%, 18.9%), GOOG (30.5%, 25.7%), SOHU (22.6%, 11.4%), and SINA (-14.3%, -61.3%).
Despite this clear advantage, shares of BIDU are trading at a Price-to-Earnings ratio (29.9X) below the company’s own 5-year (70.6X) and post-IPO (114.1X) historical averages. In fact, over the past half-decade, Baidu’s earnings have traditionally traded at a 369% premium to those of the S&P 500. This year, they are much cheaper, trading at just a 103% premium. When EPS growth is factored into the equation, we can see that the stock is trading at a five-year expected PEG ratio of 0.6; typically any figure below 1.0 signals undervaluation. Moreover, this PEG ratio is also below peers like GOOG (1.0), SOHU (3.1), and SINA (15.4).
From a cash standpoint, Baidu has seen impressive annualized growth in operating (86.3%) and free (73.0%) cash flows over the past three years, though it is trading at a Price-to-Cash Flow ratio (31.4X) below its own 5-year (40.5%) and post-IPO (57.2X) historical averages. When the PCFG ratio (0.4) is computed – which is calculated in the same manner as the PEG ratio – a similar story is told.
To recap: Baidu has been one of the quickest growing Internet stocks since the recession, generating exceptional earnings growth driven by superior margins. Now, bottom line expansion is slowing down, though it appears that the markets are underappreciating future growth potential. According to nearly every valuation metric under the sun, shares of BIDU look to be oversold. If 12 to 24 month EPS forecasts hold, the stock can eclipse $190 by next fall, making an appreciation north of 60% a real possibility. WealthLift’s Sentiment Index does rate Baidu as a strong buy, with the overwhelming majority of the community’s users placing an “overperform” rating on the stock. For more trading ideas in today’s uncertain market environment, check out WealthLift INSIDER.
Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours. He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.