Ken Heebner Buys NetEase

Company has reported outstanding financial results over the past 10 years

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Sep 15, 2016
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Capital Growth Management’s founder, Ken Heebner (Trades, Portfolio) purchased a 225,000 share stake of NetEase (NTES) at an average price of $155.40 during the second quarter. Since the purchase, the company’s market value has skyrocketed gaining an estimated 51%.

NetEase is a Chinese internet technology company that provides online services centered on content, community, communications and commerce. It was originally founded in 1997 by Ding Lei, and it was a key pioneer in the development of internet services for China. Today, NetEase develops and operates some of China’s most popular online PC and mobile games, advertising services, email and e-commerce platforms. The company is also one of the largest providers of free email services in China, it offers advanced features such as voice search and facial recognition. NetEase also offers fee-based premium email services for corporate users.

NetEase has a market cap of $31.21 billion, a P/E ratio of 22.19, an enterprise value of $29.51 billion and a P/B ratio of 6.29.

GuruFocus gives NetEase an 8 of 10 financial strength rating, with no debt. The father of value investing, Benjamin Graham, preferred to invest in companies where interest coverage is at least 5. NetEase has enough cash reserve to cover all of its debt. The company also has a 9 of 10 profitability and growth rating with revenue growth (3y) of 38.80%, ROA of 22.61%, net-margin of 29.33% and an operating margin of 33.13%, ranking the company above 91% of the 360 companies in the global internet content and information industry.

NetEase has three good signs according to GuruFocus, which may have had an impact on Heebner’s decision to purchase 225,000 shares of the company during the second quarter.

  • The company’s Piotroski F-Score is 7, indicating a very healthy financial situation.
  • The company has comfortable interest coverage and no debt.
  • The company’s per share revenue has shown consistent growth.
  • The company has an intrinsic value of $305 (DCF Earnings based), giving an adequate margin of safety.

Additionally, the company has reported outstanding financial statements over the previous 10 years. Its revenue growth has increased by 40.50%, EBITDA growth by 32.40%, operating income growth by 33.10%, EPS without NRI growth by 33.40%, its free cash flow growth has increased by 33.50% and its book value has grown by 41.60% over the previous decade.

The company’s revenue per share increased by an estimated 43.5% annually since June 28, 2006.

Ken Heebner (Trades, Portfolio)'s Capital Growth Management Fund has returned an estimated 12% since 1998, marginally outperforming the Standard & Poor 500 during the same time period.

Disclosure: Â Author does not own any shares in this company.

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