Article updated to reflect pricing open.
We’re still navigating through a rough patch in growing the outperformance of the Best Ideas portfolio, but we were very pleased to see continued validation of the efficacy of the Valuentum Buying Index, our stock-selection methodology, with Best Ideas portfolio holding Baidu (BIDU) reporting excellent fourth-quarter results after the market close Wednesday. Chinese Internet search giant Baidu is one of the top-rated firms registering a pristine 10 on the Valuentum Buying Index and one of the latest inclusions to the Best Ideas portfolio, added August 1, 2013 (view email transaction alert archive here). Shares were trading at $133.60 at the time of the alert, representing more than a 30% move in just the past few months (on the basis of its most recent share price). We know many of you that reached out to us on this company are very pleased.
Though we continue to be cautious on the economic environment in China, Baidu will benefit from the ongoing boom in the country’s Internet space. China has the world’s largest Internet user population–and a long way to go to reach penetration levels of developed countries. We think Baidu will remain at the forefront of such secular expansion for many years to come, and its most recent quarterly performance speaks to its tremendous opportunities. Total revenue in the fourth quarter jumped more than 50% from the corresponding period in 2012, with mobile now accounting for nearly 20% of the total. Operating profit and net income expansion stalled a bit during the period, but the company continues to invest aggressively in R&D to retain its competitive position and “technology DNA” in an ever-shifting Chinese Internet landscape. Net operating cash flow totaled $678.5 million and capital expenditures were $158.7 million during the quarter, revealing strong free cash flow generation. Looking ahead to the first quarter of 2014, Baidu expects revenues in the range of $1.526 billion-$1.573 billion, representing a 54.8%-59.5% year-over-year increase – well above consensus expectations.
What Next?
We’re very pleased with the equity performance of top-rated Baidu, and we expect the company’s shares to open higher tomorrow. Though we have no qualms with taking profits following a fantastic run-up in shares, we typically only remove firms from the actively-managed portfolios when they register a 1 or a 2 on the Valuentum Buying Index (or for tactical or sector allocation considerations). In this case, we still expect upside from Baidu on the basis of both our fair value estimate ($193 per share at the time of this writing) and the high end of the fair value range ($232 per share at the time of this writing)—see 16 page report. We don’t expect to make any changes to the weighting in Baidu in the Best Ideas portfolio at this juncture. Our best ideas are included in the Best Ideas portfolio and Dividend Growth portfolio.
Related Firms/ETFs: TCEHY, YHOO (Alibaba), FXI