With Plenty of Cash Left, It’s Time for Baidu to Buy Back More Stock

Stocks to buy

Baidu (NASDAQ:BIDU) announced third-quarter results on Nov. 6. While its results were generally better than in the second quarter, BIDU stock remains stuck at 2013 prices. 

With Plenty of Cash Left, It's Time for Baidu to Buy Back More Stock

Source: StreetVJ / Shutterstock.com

In the first nine months of 2019, the company has repurchased $1.2 billion in Baidu stock. Here’s why it ought to do more. 

According to the company’s Q3 2019 press release, Baidu, so far in fiscal 2019, has repurchased $397 million in BIDU stock under its 2019 share repurchase program and $778 million under its 2018 share repurchase program. 

The company’s 2018 program expired in June, which means it repurchased $397 million of its stock in the third quarter. Although the press release doesn’t indicate how much it paid for its shares, the midpoint of BIDU’s high ($116.76) and low ($93.39) between July 1 and Sept. 30 is $105.08. 

It’s my experience that most companies buy back their stock around the midpoint or higher. I’ll give Baidu the benefit of the doubt and assume that it managed to repurchase its shares in Q3 2019 at the midpoint. 

However, fiscal 2018 paints a much bleaker picture. 

Some $600 Million Left in Program

Last year, Baidu repurchased 207,165 Class A shares for $482 million. One Class A share is equal to 10 American depositary shares (ADS). That means Baidu repurchased 2,071,650 ADS in 2018 at an average price of $232.66 a piece, well above where it’s currently trading.

Up until September 2018, Baidu’s shares traded above $225. By the end of 2018, they had fallen to $162. Yet, the company made zero repurchases in the fourth quarter last year. 

In May, Baidu announced the board approved a new $1 billion share repurchase program, which was valid until July 1, 2020. It still has $603 million left on this program.

With better-than-expected results in the third quarter, it appears that the worst has passed for China’s online search champion. 

Baidu generated $1.06 billion in free cash flow in the first nine months of 2019. It finished the third quarter with $19.2 billion in cash, cash equivalents, and short-term investments, leaving it with plenty to finish off its latest share repurchase program. 

Bottom Line on BIDU Stock

Of the 17 analysts offering a 12-month price target on Baidu stock, the highest is $181, the lowest $118, and the average is $145.44, a 24% upside from its current price of $117. 

Of the 36 analysts covering Baidu stock according to The Wall Street Journal, none have a sell rating on its stock, with 28 calling it a buy or overweight with a target price of $140.93. 

There’s enough meat on the bone for aggressive investors to take a shot on Baidu stock. 

My InvestorPlace colleague Luke Lango had this to say about Baidu recently:

“But, before BIDU stock rebounds, the numbers need to prove that this is the most realistic path forward. That is, Baidu’s revenue growth rates need to actually improve. Margins need to actually rebound. Profits need to actually grow. Until those things happen, it won’t matter how cheap BIDU stock gets — it won’t bounce back.”

He’s not wrong.

This is why I feel Baidu itself can send a signal to investors that the worst has passed by repurchasing more of its shares. By buying back its stock from $117 to $200, it’s putting its money where its mouth is. If it could buy back its stock at $232, it’s a no-brainer at more than $100 less.

Am I missing something?

I don’t think so.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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