The stock of MercadoLibre (NAS:MELI, 30-year Financials) gives every indication of being modestly undervalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $1325.42 per share and the market cap of $66.1 billion, MercadoLibre stock is believed to be modestly undervalued. GF Value for MercadoLibre is shown in the chart below.
Because MercadoLibre is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, which averaged 42.6% over the past three years and is estimated to grow 36.57% annually over the next three to five years.
It is always important to check the financial strength of a company before buying its stock. Investing in companies with poor financial strength have a higher risk of permanent loss. Looking at the cash-to-debt ratio and interest coverage is a great way to understand the financial strength of a company. MercadoLibre has a cash-to-debt ratio of 0.75, which is in the middle range of the companies in the industry of Retail - Cyclical. The overall financial strength of MercadoLibre is 4 out of 10, which indicates that the financial strength of MercadoLibre is poor. This is the debt and cash of MercadoLibre over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. MercadoLibre has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $4.7 billion and loss of $0.31 a share. Its operating margin is 5.28%, which ranks in the middle range of the companies in the industry of Retail - Cyclical. Overall, GuruFocus ranks the profitability of MercadoLibre at 7 out of 10, which indicates fair profitability. This is the revenue and net income of MercadoLibre over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of MercadoLibre is 42.6%, which ranks better than 96% of the companies in the industry of Retail - Cyclical. The 3-year average EBITDA growth rate is 28.9%, which ranks better than 80% of the companies in the industry of Retail - Cyclical.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, MercadoLibre's ROIC was -1.95, while its WACC came in at 9.94.
To conclude, the stock of MercadoLibre (NAS:MELI, 30-year Financials) is believed to be modestly undervalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 80% of the companies in the industry of Retail - Cyclical. To learn more about MercadoLibre stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.