Bulls, Run Free With MercadoLibre

MercadoLibre (MELI - commentary - Cramer's Take) released stellar quarterly and year-to-date numbers last night, and I had the fabulous problem of deciding which parts of its great earnings report to highlight.

To keep it simple, I'll start with the big picture, which happens to be the best part: I believe the bull move is just warming up. After coming public this past August, the company's story is not yet "out there" (translation: brokers aren't peddling the name), and only four analysts cover the company.

Remember, I view MercadoLibre as the proxy investment for e-commerce in Latin America. If you believe, as I do, that commerce over the Internet will grow exponentially in Latin America, then this is the stock to watch. It's the Latin American version of eBay (EBAY - commentary - Cramer's Take), Amazon (AMZN - commentary - Cramer's Take), and PayPal (now owned by eBay) all stuffed into one rip-roaring growth stock.

Growth Just Getting Going at Mercadolibre

The numbers speak for themselves:

• Operating income growth year-over-year of 422.4% to $6.0 million.
• Revenue growth year-over-year of 72.4% to $22.8 million.
• Reported EPS of 13 cents compared with consensus estimates of 6 cents (upside surprise of 116%).

As I discussed in my first column on the stock, there are two key operational aspects that I believe will act as upside catalysts:

1. Increasing margins. Operating margins improved by 130 basis points as the company benefited from lower sales and marketing costs.
2. MercadoPago. The south of the border version of PayPal did not disappoint me. I wrote previously that "consensus on the Street is not reflecting the monster upside to EPS that it could provide down the road." This was borne out: Revenue growth accelerated at a 142% clip to $4.7 million, way ahead of the Street's view.

Next, let's address the inevitable knee-jerk reaction from the "outrageously overvalued" crowd. I have been saying that the earnings power of the MercadoLibre business model could post $1 in 2009, and the analyst numbers are moving closer to my number. For example, today RBC Capital boosted its '09 estimate to 98 cents from 87 cents.

Using earnings estimates of $1, MercadoLibre trades for 42 times 2009 EPS. Is a stock outrageously overvalued at that forward price-to-earnings ratio? Absolutely, if you are talking about Pfizer (PFE - commentary - Cramer's Take), which has a growth rate of less than 5%.

But at MercadoLibre, we're talking about runaway growth. As of Monday, the company had an implied growth rate of 148% on ever-rising forward numbers. The company is accelerating its growth and deserves a premium valuation. I can see the company trading between 80 and 100 times earnings, which would still be below its growth rate.

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Patrick Schultz is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He has previously obtained Securities licenses under the NASD?s Series 7, Series 24, Series 52, and Series 63 exams and has worked in the financial markets on various trading desks in addition to trading for his own account. Schultz appreciates your feedback; click here to send him an email.