MercadoLibre: Zacks’ Bear of the Day Play

Shares of MercadoLibre (MELISnapshot Report) have fallen about 20% since I last wrote about the stock back on April 10. But the stock still does not look cheap. It trades at 36x forward earnings and sports a Zacks Value Style Score of ‘F’.

Additionally, consensus estimates have fallen sharply following a big earnings miss in Q2. It is a Zacks Rank #5 (Strong Sell) stock.

MercadoLibre operates an e-commerce ecosystem in Latin America that provides buyers and sellers an online trading environment. It operates in 13 countries including Argentina, Brazil, Chile, Colombia, Mexico, Peru, and Venezuela.

Second Quarter Results

MercadoLibre delivered disappointing second quarter results on August 5. Earnings per share came in at $0.44, missing the Zacks Consensus Estimate of $0.74 by 41%. It was a 39% drop from the same quarter last year.

Profit margins declined significantly. Gross profit fell from 72.4% of net revenue in the second quarter last year to 67.4%. This was due in part to foreign currency headwinds, along with a higher contribution from MercadoPago, which has lower margins. Operating income fell from 33.1% to 22.4% of net revenue, due in large part to forex.

The one bright spot was revenue. Net revenues rose 17% year-over-year to $154.3 million versus the consensus of $149 million. And excluding forex, net revenues rose 88%.

Estimates Falling

Following the Q2 miss, analysts revised their earnings estimates significantly lower for MercadoLibre. This sent the stock to a Zacks Rank #5 (Strong Sell), placing it in the bottom 5% of all companies that Zacks ranks based on earnings momentum.

The 2015 Zacks Consensus Estimate is currently $2.42, down from $2.80 before the report. The 2016 consensus has fallen from $3.53 to $3.07 over the same period.

As you can see below, consensus estimates have been falling steadily this year:

It’s anybody’s guess when estimates will finally bottom out. But given continued economic weakness in Latin America, I wouldn’t be surprised to see these estimates continue to fall.

Lofty Valuation

Shares of MercadoLibre have had a tough year, but the stock looks far from a bargain. The stock trades at 36x 12-month forward earnings and sports an enterprise value to EBITDA multiple of 21.

The Zacks Value Style Score for MELI is an ‘F’.

The Bottom Line

With continued headwinds in Latin America, negative earnings momentum and lofty valuation, MercadoLibre doesn’t offer much to like at the moment.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.


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