Thursday, October 29, 2020

Rough notes on Baidu stock price and Graham Value $bidu

Baidu means "a hundred times".  A Googol is the digit 1 followed by one hundred zeroes: 10,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000,​000. 

 FAIL Baidu is in the Technology sector, which is one sector that this methodology avoids. Technology and financial stocks were considered too risky to invest in when this methodology was published even decades ago. Several of Graham's criteria, like the Current Ratio and Debt to Current Assets, do not apply to financial companies. As a result, the company will not be able to pass this methodology, although we will include the remainder of the analysis for informational purposes.

SALES: PASS The investor must select companies of "adequate size". This includes companies with annual sales greater than 260 million Euros. Baidu's Sales of  15 billion, based on 2019 figures, passes this test. Sales have not increased during the past few years.

CURRENT RATIO: PASS The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Baidu has  USD 24 billion in Current Assets and Current Liabilities of USD 8,5 billion. The current ratio of 2,8 is very defensive.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: PASS Long term debt must not exceed net current assets. Companies that meet this criterion display one of the attributes of a financially secure organization. Baidu has USD 16 billion of Net Current Assets and USD 10,2 billion in debt and thus passes this test. 

LONG-TERM EPS GROWTH: PASS FAIL Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. EPS for Baidu have increased 300% in ten years, but dipped in 2019 and haven't really increased since 2017

Earnings Yield: PASS FAIL The Earnings/Price (E/P) ratio, based on the lesser of the current E/P or the E/P using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,6%. Stocks with high Earnings Yields are more defensive by nature. Baidu's Earnings Yield of 6% (based on this year's estimated Earnings of USD 8 per share) is close to passing this test.

GRAHAM NUMBER: FAIL The geometric average of 1,5 x book value and 15 x EPS is the Square Root of 1,5 x 67 USD x 15 x 6 USD = 91 USD.

DIVIDEND: Baidu does not pay a dividend but is buying back roughly 1/15th of its shares. USD 3 billion in buybacks.

Conclusion and Disclaimer 2020: I own Baidu shares via  

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