MercadoLibre Stock Explodes Higher After a Blowout Quarter

Source: MercadoLibre

MercadoLibre (MELI -1.79%) stock exploded nearly 14% higher on Thursday after the close, as the company delivered a blowout earnings report for the third quarter of 2014. While economic conditions in Latin America are a considerable drag on the company, MercadoLibre is proving to be strong enough to thrive through all kinds of scenarios. Let's take a look at MercadoLibre's latest report and the main implications for investors.

A challenging environment and a strong business
MercadoLibre is facing considerable volatility from economic instability in Latin America. The company has changed the exchange rate that accounts for its operations in Venezuela to better reflect economic conditions in the country. This resulted in a massive downward adjustment to U.S. dollar figures in Venezuela.

Brazil and Argentina are MercadoLibre's first- and second-largest markets, respectively, in terms of revenues. Both countries are going through stagnant economic growth, rising inflationary pressures, and increased currency volatility.

This means that figures in local currencies are probably too optimistic, because they hide the fact that those currencies are losing value against the U.S. dollar. On the other hand, the negative impact from currency devaluations has been particularly heavy during the last months, so figures in U.S. dollars are probably exaggerating the long-term impact of currency fluctuations on the company's business.

In any case, the good news for investors in MercadoLibre stock is that performance was strong across the board, both in U.S. dollars and local currencies. Besides, operational metrics confirm that MercadoLibre is truly firing on all cylinders.

Rock-solid financial performance
Total sales during the third quarter of 2014 were $147.9 million, a huge increase of 20.2% versus $123.1 million in the same quarter last year. The number was considerably better than the $131 million in sales expected on average by Wall Street analysts.

Sales in local currencies jumped 89% year over year. Excluding Venezuela, net revenues in local currencies grew 58.9%, while local currency revenues in Brazil increased 48.8%.

Gross profit margin was 70.7% of sales during the last quarter, down from 72.3% in the third quarter of 2013, as increased penetration of MercadoPago produced higher payment processing fees. Operating margin was 31.9% of sales, an increase of 148 basis points from 30.4% in the same quarter last year.

Net income came in at $33.8 million, a year-over-year increase of 15.8% in U.S. dollars, and a 114.2% jump in local currencies. Net income in local currencies, excluding Venezuela, grew 43.3% during the quarter.

Earnings per share for the third quarter of 2014 were $0.76, materially above the $0.65 per share forecasted on average by Wall Street analysts according to data compiled by Thomson Reuters.

Moving in the right direction
Leaving monetary considerations aside, MercadoLibre is clearly moving in the right direction when looking at key metrics such as users and items sold via the company's platforms.

Source: MercadoLibre.

The company has 115.2 million confirmed registered users as of the end of the quarter, a 21.3% increase versus the third quarter in 2013. Items sold grew 22.3% year over year, to 26.9 million units in the quarter. Payment transactions via MercadoPago jumped by an impressive 48.8%, from 8.4 million in the third quarter of 2013 to 12.5 million in the last quarter.

Source: MercadoLibre.

MercadoLibre is expanding its shipment platform to provide a more consistent shipment experience to buyers, and strengthen its competitive position in the industry. While its MercadoEnvios initiative is relatively new, it seems to be clearly gaining traction. MercadoEnvios shipped more than 30% of items sold in Brazil during the quarter, an increase from 25% in the second quarter.

The company is also aiming to become the preferred e-commerce partner for big and popular retailers in Latin America, and it's seeing results in that area, too. MercadoLibre reached 364 official stores in Brazil, Mexico, and Argentina, adding 138 new brands in the quarter.

The takeaway
Even a mediocre company can do well when the wind is on it's back; but it takes a particularly strong business to deliver outstanding performance across the board in the face of heavy headwinds. MercadoLibre keeps proving to investors that it has what it takes to generate extraordinary growth through good and bad economic times.