Baidu: Zacks’ Bear of the Day Play

Baidu, Inc. (BIDUSnapshot Report), the Google of China, is taking it on the chin due to economic events in China and its decision to spend more on sales and marketing for its online-to-offline business. This Zacks Rank #5 (Strong Sell) is expected to see falling earnings this year.

Baidu is one of the top Chinese language Internet search providers.

Another Miss in the Second Quarter

On July 27, Baidu reported its second quarter results and missed on the Zacks Consensus Estimate for the third quarter in a row.

Earnings were $1.64 versus the consensus of $1.80.

On the conference call, the company said that it expected higher than previously disclosed sales and marketing expenses in the online-to-offline business. This was a surprise to the analysts.

Baidu is up against a very competitive space in the online-to-offline world, including some Alibaba affiliates. It is going to have to spend more to be competitive.

The spending appears to be a multi-year event.

Estimates Slashed

Given the nearly doubling of spending on marketing and sales, analysts have had to cut estimates sharply for 2015.

The Zacks Consensus Estimate has fallen to just $5.60 from $7.14 ninety days ago. That is actually an earnings decline of 6.8% from 2014.

While a rebound is expected in 2016, even those estimates had to be cut. 2016’s Zacks Consensus Estimate has fallen to $7.10 from $9.92 just 60 days ago.

Shares Sell Off

Shares were hit on the earnings miss and news about further spending.

In response, on July 30, Baidu announced a surprise $1 billion share buyback that it would do over the next 12 months.

But that hasn’t stopped the slide in the shares. Every time there is big news out of China about weakness in the economy, shares seem to sell off further. They are down 37% year to date.

With the sell-off, are shares now a value?

Even with the big pullback, they’re still trading with a forward P/E of 24. That’s not exactly cheap considering its negative earnings growth.

With all the stock market turmoil and government stimulus going on in China, it might be best to just steer clear of Chinese stocks altogether.

If you must own an Internet provider, why not just buy Google (GOOGLAnalyst Report)? It’s a Zacks Rank #2 (Buy) and is expected to grow earnings by 12% this year.

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Insider Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

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