Mercado Libre: Investing in "Amazonia"

10/11/2017 5:00 am EST

Focus: GLOBAL

Vivian Lewis

Editor and Publisher, Global Investing

Mercado Libre (MELI) of Brazil is our new stock pick, based on research by Crédit Suisse. It is the "Amazonia" version of Amazon (AMZN), asserts Vivian Lewis, international expert and editor of Global Investing.


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The Swiss bank's retail analysts have just boosted the target price on to $350, by $10. MELI now costs $262 so that is a bullish call.

The boost came after a Q2 which was lower in profits than anticipated, so this is what Crédit Suisse calls a “conviction call”. It cut its estimates for 2017 EPS to $2.40 from $4 because of the impact of offering free shipping which hurt Mercado in the short term in Brazil.

The free shipping costs will impact its Argentina margins in a year's time when it will be rolled out. But free shipping is a variation on how Amazon gained market share in the end, suffering in the short term for the sake of the long.


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Crédit Suisse expects it will work in Latin America too. The shipping will increase the absolute franchise size in Latin e-commerce and stop rivals from gaining traction.

Moreover, once they have benefitted from free shipping, Latin Americans with come to expect it from competitors (including physical stores). Building its moat and customer base will guild out MELI's long term profit dollars.

The analysts set out to judge the potential for long-term return by adjusting forecasts. After dropping from a reported $3.09 in 2016 to an estimated $1.64 this year based on the first half of the year, the company expects single digit EPS next year and recovery only in 2019 when it thinks it will earn $1.93 per share.

However, Crédit Suisse thinks these numbers underestimate the tradeoff between costs and client loyalty. And for whetever it is worth, the stock table shows considerable optimism too as the tough year-on-year comparisons did not hit the stock price which has hovered around $250 since April.

For the 1st quarter, MELI reported eps of $1.24 up from 74 cents the year before; but for Q2 it only got 27 cents vs 62 cents a year before. The Q3 lag was no surprise.

The Crédit Suisse estimates are that EPS this year will really be at $2.40/sh and next year will be at $1,.12 (vs an earlier estimate of $6.32, now abandoned.) The payoff will be starting in 2019 when the latest CS estimate if for EPS of $3.08 vs an earlier optimistic forecast of $9.33.

Revenues are galloping ahead however you view Mercado: $844.4 million in 2016; $1.201 billion this year; $1.775 billion in 2018; and $2.465 billion in 2019. That is a nice chunk of change.

It is generated by Crédit Suisse using international metrics to correct Brazilian financial reporting, a form of advanced analysis by its Stephen Ju and Christopher Ford who are retailing specialists.

So far unmentioned is the impact on Mexico where the competition includes WalMart (WMT). In Mexico it offers both shipping for free and on-platform payments systems which boost profitability and cash flow, not that dissimilar to Amazon.

The company has debt denominated in dollars and servicing this is not a slam dunk either although currency it is well covering by cash flow. Crédit Suisse assumes there will be no further shares issued and long term debt will remain modest. Most of its debt is short term supplier credits as is normal in retailing.

The key metric, as with Amazon itself, is sales growth: 54% this year; and levels in the high 30s over the next two years. The analysts include a blue sky forecast (if everything goes right) of $370 per share and a lower estimate for grey skies of $250, not much below the current valuation. Buy Mercado Libre.

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