Director, Business Development, Hillside Advisors LLC.
MercadoLibre, Inc. (MELI): A Call Option on Latin American Economies
MercadoLibre, Inc. (MELI): A Call Option on Latin American Economies
MercadoLibre, the Latin American online marketplace and HOCS 20 member, reported strong fourth quarter numbers last Thursday, continuing growth trends despite weak Latin American economies and the resulting currency devaluations relative to the US dollar. However, macroeconomics ruled the day, as MELI’s stock price dropped almost 5% on Friday to settle at $97.56 per share, despite beating estimates.
For the quarter, net revenues increased 12% in US dollar terms, but a more impressive 68.9% in local currencies. MercadoLibre grew in every country in which it operates and across all business lines. It is a testament to the company's ability to introduce new products and increase potential income on every transaction.
A summary of the quarterly results are:
Revenue in $ millions
|
Actual 12-31-15 |
Consensus Estimated 12-31-15 |
Percent Difference Act. V. Est. |
Previous Year Actual 12-31-14 |
Percent Change Y-O-Y |
Revenue |
$180.7 |
$171.6 |
5.3% |
$161.4 |
12.0% |
Adjusted EPS |
$0.88 |
$0.69 |
27.5% |
$0.76 |
15.8% |
The HOCS score for MercadoLibre's 2.25% July 2019 convertible bond is a balanced and impressive 68 overall/68 growth/67 safety. The company's strong results support the convertible bond, which is trading above par at 102.50. While Latin America’s economies languish in the doldrums and currencies will remain headwinds, we like MELI’s steady growth and strong balance sheet. Any boost in Latin American economies and the bond could rally significantly to its former highs of $150 per share last summer. Conversely, as global equity markets struggle and MercadoLibre top-line growth remains stuck in first gear in dollar terms, the stock’s p/e could be repriced to a number significantly lower than the current 33 time 2016 EPS estimates.
Business Description:
MercadoLibre operates an online marketplace in Latin America where sellers, including individuals and stores, can list new and used items for sale. The marketplace is available in Argentina, Brazil, Chile, Columbia, Costa Rica, Ecuador, Mexico, Peru, Uruguay, Venezuela, the Dominican Republic, Panama and Portugal. During the fourth quarter, MercadoLibre also launched operations in Bolivia, Paraguay and Guatemala. Whiles growth rates are slowing as a result of the sluggish Latin American economies, they remain robust.
YoY Growth rates - Consolidated Net Revenues
Q4'14 Q1'15 Q2'15 Q3'15 Q4'15
Brazil 61% 58% 58% 47% 42%
Argentina 98% 94% 90% 83% 79%
Mexico 21% 32% 26% 26% 29%
Venezuela 253% 284% 284% 281% 272%
Others 61% 33% 12% 3% 14%
Total 109% 100% 88% 68% 69%
Each country market place is distinct from the buyer's viewpoint, so products listed in one country's marketplace do not automatically appear in another country's marketplace. Products can be listed in a fixed-price or auction-based format. At the end of 2014, MercadoLibre had 120.9 million confirmed registered users, an increase from 99.5 million in 2013 and 81.5 million in 2012 respectively.
MercadoLibre recently tweaked its business model, charging sellers only when a sale is completed verses its previous model of charging both listing fees and commissions for successful sales. MercadoLibre made the switch in order to encourage sellers to list more products, thereby deepening the product assortment for buyers.
MercadoLibre has also developed additional products to further monetize the marketplace. The largest of these services is the "MercadoPago" online payments solution which is up and running in Argentina, Brazil, Mexico, Columbia, Venezuela and Chile. The system is integrated into the marketplace, but can also be used by buyers and sellers outside the MercadoLibre marketplace. For sellers outside the marketplace, MercadoPago can be directly integrated into a vendor’s shopping cart to provide buyers with a seamless experience. In 2014, MercadoPago processed over $3.5 billion in transactions, up from $2.5 billion in the previous year. The company requires that all paid listings on its marketplace require MercadoPago be used where the service is offered except Chile.
MercadoLibre recently changed its installment payment system to offer products through an interest-free installment plan. This change aligns the marketplace more closely with the bricks and mortar retail world in Latin America where retailers often offer installment plans on an interest-free basis. While MercadoLibre gives up the interest income on the sale, it charges the seller an additional fee to make up the difference. The interest-free installment plan has proved extremely popular where it has been introduced.
MercadoLibre also offers a classifieds service to assist sellers in generating leads on listings in the motors, real estate and services categories in all the countries where the company operates. MercadoLibre sells ad space on its pages and within its search function on a cost per click basis. The classifieds section also serves as a major source of traffic to the marketplace. In 2014, MercadoLibre had an average of 1.2 million classified ads daily.
In 2010, the company introduced its Mercado Shops solution whereby users can set-up their own on-line webstores. The system is fully integrated into the MercadoLibre marketplace, payment system and classifieds.
MercadoLibre also introduced its shipping function during 2013 and 2014 in Brazil, Argentina and Mexico. The service is integrated with existing logistics and shippers to provide sellers with a seamless shipping alternative.
The growing importance of non-marketplace revenues can be seen in the following chart:
Years ended December 31,
Consolidated net revenues by revenue stream
2015 2014 2013
Marketplace $393.0 $376.2 $331.3
Non-Marketplace $258.8 $180.4 $141.3
Total $651.8 $556.5 $472.6
MercadoLibre has been insulated from the larger US online retail marketplaces as it counts Ebay as a shareholder and Amazon only operates online streaming content in Brazil.
Credit Risk:
MercadoLibre's current financial structure is sound with the $330 million convertible the bulk of the company's debt against $370 million in cash equivalents. Further, MercadoLibre generated $84 million in free cash flow in the fourth quarter alone. Of note, credit card receivables increased $41 million as the company expanded its MercadoPago payment product. As MercadoPago expands, funding needs will be on the rise.
MercadoLibre credit risk lies mainly in the depreciating Latin American currencies where the company operates. If local currencies continue to depreciate as commodities grind lower and world economic growth slows, there is a point where MercadoLibre’s ability to pay its debt in dollars will be impacted. While the credit is still fine even with oil near seemingly unsustainable long-term levels, this is a risk that investors must continually monitor.
Conclusions:
While MercadoLibre’s strong cash flow supports the convertible bond price, the company offers investors a call option on any upside in Latin America. Management's continued creativity and willingness to look beyond its marketplace for growth is also notable. Both MercadoLibre's payment and shipping products are positioned for sustained out-of-marketplace growth and the company continues to develop its mobile platform with over 50% of new registrations now coming through mobile.
This is a company facing strong macro headwinds, but continuing to execute its strategy to produce growth. For those more cautious investors with a negative outlook on equity markets, it would be worth waiting for a lower P/E ratio to materialize on the stock. For investors looking for exposure to a Latin American rebound, we say "vamonos" to the company's convertible bond as there seems to be minimal downside to the bond through maturity given the company’s credit profile and ability to raise cash.
(For the credit waterfall and/or the financial summary charts feel free to reach out and I'll provide them under separate cover)