Wednesday, January 28, 2015

Baidu, Inc. (BIDU): Rhymes With Two-Two-Two Price Target

Baidu, Inc. (BIDU) topped earnings estimate this morning and the NASDAQ 100 member is bucking the index's downdraft.

Baidu is essentially China's Google. The company provides Chinese language Internet search services. It also offers a Chinese language search platform for businesses to reach their customers. The company provides search products, social products, UGS-based knowledge products, location based products and services, music products, PC client software, mobile realted products and services, products and services for developers, and products and services by associated or cooperative Websites.

The better than expected result has analysts stepping on each other's toes with upward price revisions for BIDU.

Brean Capital upped the rating to a "Buy", and a $200 price target, J.P. Morgan  to $190, Pacific Crest says $195, Barclays put it at $198, HSBC  is the first to call for two bills, Mizuho sees $10 more than HSBC, and finally, Jefferies one upped everybody else with an upgrade to "Buy" from "Hold" with a price target of $222.00.

Jefferies justifies it target like this, "3Q13 revenue and earnings beat Street with strong 4Q guidance. Our checks indicate increasing mobile search demand and incremental mobile ad budget from Baidu's customers. We believe Baidu's new product launches and strong monetization capability will deliver further revenue upside. We revise up FY13/FY14 revenue est. by 2.1%/4.8%. Upgrade to Buy with PT revised up to US $222 based on 25x forward FY15 PE."

The Jefferies analyst appears to be working with the local shares in his price determination as 222 divided by 25 equals $8.88, which is considerably below Wall Street's ADR consensus estimate of $38.98. Each BIDU share represents 10 shares on the Chinese stock market.

That's an aggressive EPS call from Jefferies as it implies more than 100% bottom line growth from 2014 through 2015. If that's the case, a 25 P/E is small potatoes (we spell-checked with Dan Quayle). Most financial textb! ooks will tell you that a one-to-one ratio for earnings growth to P/E is acceptable, which means BIDU would not be overvalues with a 100 price-to-earnings ratio if earnings are doubling.

Since 2009, the AMEX Internet Index member's average P/E is 49.19. During the same timeframe, profit grew at an average rate of 78.69%. So, Baidu tends to trade a 37% discount to its earnings growth rate. If Jefferies made the correct call and the historical P/E to growth rate relationship holds up, then a 25 P/E on 2015 EPS should be a layup.

Overall: Despite our distaste for Wall Street group think, Baidu, Inc. (BIDU) has an excellent chance of topping all of the above price targets if BIDU hits Jefferies 2015 earnings estimate.

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