Calculating MercadoLibre's Q4 EPS

Now that I have the MercadoLibre (MELI) weighted-average-shares issue mostly dealt with, I’m going to complete my earnings per share calculation. I’m going to slightly adjust my numbers to be more aggressive here. If this is a mistake we’ll see for sure soon enough. Perhaps I’m just too stubborn to allow my numbers to give me zero quarterly sequential growth in earnings for a company that I have a substantial holding in. That’s what my prior numbers would’ve given me. We’ll see.

• $26.5 Million in revenue
• 25% operating income margins
• $6.625 income
• Foreign currency holdings loss estimate: $1,000,000
• Other expenses: $1,000,000
• Income/Asset tax expense rate from Q3: 33.4%, Q4 with same rate gives $1,544,750
• Income after tax: $3,080,250
• Preferred stock cost estimate based on rough average: $100,000
• Net income: $2,980,250

Taking into account the appreciation of the Brazilian Real (Brazil accounts for roughly 40% of net income), which gained an average of 10% during the quarter from the average of Q3:

• $2,980,250(0.40)= $1,192,100
• $1,192,100(1.10)= $1,311,310
• (0.6)$2,980,250= $1,788,150
• $1,311,310 + $1,788,150 = $3,099,460
• $3,099,460 / 44,226,567 = $0.07 per share

This is sequential growth rate of 16.67% using the total share count of 44,226,567 retroactively for Q3 (0.06 per share in Q3). This leads to an annual growth rate of 85% going forward (if my numbers are close and if the Q3 to Q4 growth rate is indicative of the company’s growth trend).

Additionally if you multiply 0.07 by 4 you get a price to earnings ratio of 113 using today’s closing price of 31.72 for MELI. Based on this sequential growth rate of 85% (which is sure to change but I think is still worth extrapolating because investors and traders will) I expect earnings of 0.08, 0.095, 0.11, and 0.13 in Qs 1 through 4 and total earnings of 0.415 in 2008. This is substantially below analyst estimates of 0.54.

Despite this Mercadolibre is still trading at a P/E of 76 using these lower than expected 2008 earnings. Downside should be limited but with an earnings miss of at least 0.03 compared to analyst estimates of 0.10 and slowing growth and higher costs may still drive the stock lower. I still expect that it will be higher at the end of the year than it is now.

Though these numbers show an EPS of 0.07, it is quite possible that MELI will earn 0.06 (using yesterday’s more conservative numbers).

The big questions are why MercadoLibre’s revenue growth rate slowed and why margins shrank in Q4 (this is not yet a fact but the company released guidance in January estimating this would be the case). If there is a good and short-term reason for this, shares should ultimately rise following the earnings report and conference call. If there is no good reason and MercadoLibre’s growth rate slowing is not a temporary blip and spending growth will continue to trend higher than revenue-shareholders like myself may be in for more punishment. As I said earlier though, I think MELI is cheap even given the worst-case-scenario. It should easily be trading above 40 by mid-year.

Disclosure: I own shares in MELI.

Comments

[TimothyPereira]

It turns out my analysis was wrong (as pointed out by a commenter on my blog, Brad). Approximately one million dollars in expenses from Q3 is not recurring because it was related to the exercising of warrants and I wrongly thought this was a recurring expense. Adding this change to my calculations, Mercadolibre should earn at least 0.09 per share in Q4.