On Friday, Mercadolibre disclosed in an 8-K filing that it has requested to value its Venezuelan operations using the SICAD II exchange rate, which is 49.98 bolívares fuertes per U.S. dollar. Currently, the company uses the SICAD I exchange rate (Bs 10.10 per $1.00), but it has been unsuccessful to date in gaining access to U.S. dollars. The SICAD II rate is an active exchange system that should allow the company to convert bolívares fuertes into U.S. dollars.
As a result of this currency move, the company will incur one-time asset write-downs of roughly $47 million to $57 million and a foreign-exchange loss of $14.5 million to $21.5 million. The company estimates the devaluation will reduce second-quarter revenue by $12 million to $18 million, partly offset by a $6.5 million to $9.5 million tax benefit. While negative on the surface, investors expected further devaluation in this market for some time. Our valuation methodology already assumes the company will use the “black-market” rate in Venezuela, which is roughly Bs 68 per $1.
We view the move to SICAD II as a net positive because it signifies that the company might be able to monetize value in the Venezuelan operation. In addition, it removes an overhang for investors who have been waiting for the exchange rate in this country to move closer to the black-market rate. We believe current valuation levels already reflect this type of devaluation.
Prior to the adoption of the SICAD II rate, we had projected $540 million and $637 million in total revenue for 2014 and 2015, respectively. The move to SICAD II reduces our annual revenue estimates to $500 million in 2014 and $587 million in 2015. This adjustment results in a $0.50 reduction to annual EPS, although this will only affect two-and-a-half quarters in 2014. We our lowering our 2014 EPS estimate to $2.80 (from $3.15) and our 2015 EPS estimate to $3.25 (from $3.75).
On our adjusted estimates reflecting the change to SICAD II, MercadoLibre trades at a relative P/E premium of 2.1 times to the S&P 500 on our 2014 EPS estimate and an enterprise value to sales multiple of 7.0 times, which is a significant discount to the historical averages of 2.9 times and 8.7 times, respectively. If shares were to be accorded the historical P/E premium versus the S&P 500, the implied share price would be $125.
We continue to view this as an attractive level for long-term investors, and we believe MercadoLibre remains well positioned with meaningful scale advantages, high return on capital, and a big long-term opportunity as e-commerce still represents less than 3% of retail sales in Latin America (compared with a low-teens percentage in the United States).
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