"Common sense will tell you that the only time you can get something for a small fraction of what it's worth is when other people are despondently selling. So it's been a new theory of mine, the theory of maximum pessimism. If you want to succeed in selecting investments, look for the points of maximum pessimism."
Sir John Templeton, investor and philanthropist. Born November 29, 1912. Died July 8, 2008, aged 95
Back in the period March to May this year, this blogger took Mercado Libre (MELI) to task for being overvalued on several occasions. The permabull cheerleader brigade proceeded to pull the analysis to bits and "prove" Otto was talking crap, even when I pointed out the heavy insider selling that was going on. The stock stood at between $40 and $60 at the time of the unwarranted attacks, and here we are with MELI under $20; that's called "proof of the pudding", people (as people close to me know, I'm quite insufferable when I'm right). On the other hand, I did fail to trade the stock very well even though the global call was correct. This is far more typical of me than the recent successful ST foray into SLV*, as I'm much better at LT views than trading. So be it.
Ok, mucho blah blah blah...the point of today's post is to revisit and examine if MELI now offers value. First up, let's look at how revenues have evolved in the last two years (click any chart to enlarge, by the way):
Obviously, top line growth is healthy enough. In fact it's never been a problem, even when the stock was priced way above its station. Next here's a chart that maps EPS since 3q06 to date, and adds in my own forecast for EPS in the two quarters left to report this year.
As you can see, bottom line profits growth is just fine. So here's a chart that maps out actual and forecast trailing P/E ratio at MELI for 2008 and 2009 (according to my casio and finger in the air, anyway).
With P/E projected at 20X trailing for the end of next year, no long term debt at the company, plenty of growth, no big overheads and a market share that's as close to a monopoly in the region as possible it certainly looks interesting at these levels. It's also worth pointing out that its main revenue market, Brazil, is experiencing ongoing strength in its retail sales sector and continues to ignore the machinations of its own stock market. Whether such strength continues in the next four quarters is debatable, of course, but Brazil isn't slipping into recession this time around, no way José.
