Why Buy Baidu - Tactical Trading
October 27 2011 - 8:00PM
Zacks
Two weeks ago, I recommended looking for buying opportunities in
Baidu (BIDU) after the stock had found support at $100.
Ahead of its earnings, reported yesterday, I said be prepared to
buy it on the breakout above $135, or on any dip back toward $110.
Even if you bought the first breakout above the 50
and 200-day moving averages at $135 and suffered the pullback to
$120 last week, you still did very well as the stock surges above
$140 today on the back of its strong Q3 report, hitting a high of
$147.68.
Why Buy Baidu?
One year ago this week, I made the
techno-fundamental case for buying the stock around $110. As
Google (GOOG) exited China, Baidu would only clean up.
Writing for TheStreet.com, here was my rationale...
"Apparently, institutional growth and technology
investors love the BIDU story. And though the earnings are modest
now, they are growing rapidly. 2011 estimates could see $2.50,
which would bring this $100 stock down to a more comfortable 40x
multiple. But it seems the real appeal of BIDU might be in futures
earnings not even visible yet.
As the dominant Chinese search engine and web
portal, investors see the potential for BIDU to capitalize on the
largest fast-growing middle class population in the world. I have
written often in the past year about the Chinese emerging markets
story fueling the growth of American industrial companies like
Caterpillar (CAT) and Eaton (ETN).
But I haven't paid much attention to the consumer
side of China's ascendancy. Obviously, young, educated, and
ambitious Chinese citizens will use the web more and more to learn,
acquire, and do business. And however American consumer companies
gain access to Chinese markets, they may end up adding profits to
BIDU's business model too, whether partnering, paying an
information or transaction toll of some kind, or merely through
advertising."
Keep Buying Dips in Baidu
What's changed since I wrote that one year ago?
Nada. Well, except that they are on pace to earn nearly $2.90 this
year. And beating the 3rd quarter estimates yesterday by a penny
helped the cause.
But what was more impressive was the sales growth.
Here's the story from Pete Barlas, writing for Investor's Business
Daily today...
Revenue jumped 94% to $654.7 million. Analysts
had expected $619.3 million. Part of the big gain, though, was from
Baidu including for the first time results from its travel search
unit, Qunar. Baidu didn't say how much that added to its top
line.
For the current quarter, Baidu said it expects
revenue of $691.4 million to $711 million. The midpoint, $701.2
million, would be up 89% from Q4 2010. Analysts had forecast $649.4
million.
This kind of growth will probably lead to rising
EPS estimates, keeping the forward P/E below 50. I am not as
optimistic as most analysts with price targets near $200. But I
think we can see $175 in the next three months and I will buy the
dips with call options.
Disclosure: No positions at this time.
Kevin Cook is a Senior Stock Strategist with
Zacks.com
BAIDU INC (BIDU): Free Stock Analysis Report
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EATON CORP (ETN): Free Stock Analysis Report
GOOGLE INC-CL A (GOOG): Free Stock Analysis Report
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