"A perpetual holiday is a good working definition of hell."
George Bernard Shaw
Baidu, Inc is a Chinese language search provider. Its search services allow users to find pertinent information online, including Web pages, news, images, documents, etc. Baidu serves three types of online participants, including users, customers and Baidu union members. As of December 31, 2010, it had approximately 412,000 active online marketing customers. We like Baidu for the following reasons:
- It is the leading Chinese-language Internet search provider. In addition, it offers hundreds of millions of local (Chinese) consumers and businesses instant messaging services, online marketing services, entertainment and commerce platforms.
- Operating margins of 54%.
- A projected growth rate of 53% in 2012 and 41% in 2013.
- Approximately, 50 million locals are joining the ranks of the middle class every year and an increase in discretionary income usually leads to higher spending on new technologies, which is a bonus to Baidu as it leads to increased usage of its services. It is now installing its search box on smart phones in China, which will only serve to further boost sales and revenues.
Reasons to be bullish on Baidu, Inc (BIDU):
- A good free cash flow of $565 million.
- A very strong five year sales growth rate of 79%.
- Net income has skyrocketed from $218 million in 2009 to $1.02 billion in 2011.
- A very good long-term debt to equity ratio of 0.15.
- Excellent profit margins of 45%.
- A 5 year ROE average of 41%.
- A strong quarterly revenue growth rate of 89%.
- A very good quarterly earnings growth rate of 79%.
- A high beta of 1.93 which makes it a good candidate for covered writes.
- Cash flow per share is up almost 250% from $1.01 in 2009 to $3.42 in 2011.
- Sales surged from $652 in 2009 to $2.3 billion in 2011.
- Annual EPS before NRI has skyrocketed from $0.25 cents in 2007 to $3.02 in 2011.
- A very good current and quick ratio of 3.6 and 3.60 respectively.
- It has a projected EPS growth rate for the next 3-5 years of 45%.
- A total 3 year returns of 667%.
- An incredible 5 year total return in excess of 1350%.
- $100K invested for 10 years would have grown to $1.8 million.
Many key ratios will be covered in this article and investors would do well to get a handle on some of the more important ones which are dealt with below.
Long-term debt-to-equity ratio is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balance sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase, the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.
Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt. The cash flow is what pays the bills.
The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than they are making. This situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for some time. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest - Ares Capital An Interesting Play.
Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing future earnings. Ideally the company should have a ratio of 1 or higher.
Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditure, then its free cash flow is $300 million. If the share price is $100 and the free cash flow per share are $5, then company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. This gives you an idea of how the company you are interested in holds up to the other companies within the industry.
Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.
Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article Dividend Plays: Kimberly-Clark Our Top Pick.
Company: Baidu Inc
Free cash flow = $565 million
Growth
Performance
Valuation
Company: The Mosaic Company (MOS)
Levered Free Cash Flow = 464.38M
Growth
Dividend history
Dividend sustainability
Performance
Valuation
Company: Rediff.Com (REDF)
Basic Key ratios
Percentage Held by Insiders = 70.66
Growth
Performance
Valuation
Potash Corp. of Saskatchewan (POT)
Free cash flow=f $472.25 million
Growth
Dividend Sustainability
Payout Ratio = 11%
Performance
Dividend history
Company: Enterprise Product Partners (EPD)
Levered Free Cash Flow = -898.45M
Basic Key ratios
Percentage Held by Insiders = 34.7
Number of Institutional Sellers 12 Weeks = 1
Growth
Dividend history
Dividend sustainability
Performance
Valuation
Conclusion
Despite the initial pull back the markets are still extremely overbought and need to let out more steam. Prudent investors would do well to wait for a strong pullback before committing funds to this market. A pullback in the 7-12% ranges would qualify as a strong pullback.
Disclaimer
This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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