Chinese search engine giant Baidu (
BIDU
,
quote
) is scheduled to report earnings on October 29
th
, with expectations for a net of $1.29 per share on $1.0 billion in
revenue.
[caption id="attachment_57355" align="alignright" width="300"
caption="Baidu has beat expectations in every quarter of the last
12"]
[/caption]
If met, earnings will have grown by 53.6% over the same period
last year and the price multiple for the share would be the lowest
it has been since global markets bottomed in 2009. The company has
beat expectations in every quarter over the last 12 so there is
little doubt of a beat, only by how much.
The real story here is the price at which investors can snap up
a tremendous growth story. For comparison, Google (
GOOG
,
quote
) is trading for about 21 times trailing earnings and is expected
to grow by 23% per share net over the next four quarters.
Baidu is expected to grow earnings by almost twice that and is only
trading at 29.6 times trailing earnings. In fact, at this price,
the shares have only been cheaper 4% of the time in the last three
years.
Management is blowing out peers in the industry with an
operating margin of 51.3%, higher than 84% of those in computer
services, and a return on equity of 55.1%, which is greater than
94% of competitors in the industry. Even if management were to drop
the ball, the rate of internet growth in China means the stock
should have a much higher price multiple.
Internet usage in the country
has increased from 22.5 million to 420 million in the decade to
2010, a compound annual rate of 34%. Don't expect growth to slow
anytime soon; penetration is just 31.6%, far below the United
States at 77%.
Google officially exited the market in 2010 owing to censorship
and hacking issues, redirecting Chinese search queries to
google.com.hk in Hong Kong to bypass Chinese regulators. As of the
second quarter 2012, Baidu received 79% of Chinese search revenues
with Google a distant second on 16%.
The matrix above shows possible one-year price targets given a
trailing price multiple between 20 and 35 times and earnings growth
between 45% and 65%. Both ranges are fairly conservative given the
company's history but present an attractive call on the shares.
