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Sunday, August 2, 2009

EBAY - This Time, We Agree with the Barron's Cover Story

As relayed last week, we strongly disagreed with the early July cover story from Barron's highlighting j2 Global Communications (JCOM, $23.99) as one of five short ideas. We recently wrote to Barron's about this and, we're happy to report, they included a short version of our commentary in the Mailbag section of this week's issue - link here.

However, this time around, we couldn't agree more with Barron's 8/1/09 cover story calling out eBay (EBAY, $21.25) as an excellent company and stock opportunity on an absolute and relative basis - link here. We first purchased EBAY in the mid-$20s last year and, like other investors -- including successful value investor David Winters of the Wintergreen Fund -- we were early (*Mr. Winters has since jettisoned EBAY, but at 6/30/08, his average cost was $29.49 per share). Happily, we were able to significantly average down as the stock tumbled into the low teens over the past year. The stock briefly traded below $10 for one day -- on 3/6/09 -- as chaos/fear was rampant.

The Barron's story correctly notes some of the reasons we still like eBay:
  • "produces copious cash flow"
  • "trades at a 20% discount to the broad stock market"
  • "looks like a bargain relative to similar e-commerce outfits such as Amazon" (AMZN, $85.76).... "Last year, eBay earned about $1.8 billion on $8.5 billion of revenue. Amazon netted $645 million on $19.2 billion of sales."
  • "in PayPal, an online-payments system, and Skype, an Internet-communications service, eBay has two unappreciated businesses whose growth is far outstripping that of many other technology-based services."
While Amazon has done a great job establishing an online shopping franchise, we think eBay's e-commerce business will remain a formidable online presence for years to come. Simultaneously, PayPal and Skype can serve as the growth engines (*Skype to be spun out). The below table from Yahoo! Finance quickly illustrates eBay's superior margins relative to Amazon, but meaningful valuation discount (*acknowledge that Amazon is realizing higher growth at present, for which the market awards a premium valuation that; too expensive for us):


Market Cap:37.03B1.29BN/A27.42B101.32M
Qtrly Rev Growth (yoy):14.50%-4.40%N/A-4.40%15.40%
Revenue (ttm):20.51B5.07B401.90M18.27B275.29M
Gross Margin (ttm):22.57%37.08%N/A72.13%36.85%
EBITDA (ttm):943.00M347.48MN/A2.67B6.41M
Oper Margins (ttm):3.78%3.33%N/A22.90%-1.60%
Net Income (ttm):663.00M83.95MN/A1.54BN/A
EPS (ttm):1.5171.333N/A1.195N/A
P/E (ttm):56.5317.28N/A17.7815.41
PEG (5 yr expected):2.32.01N/A1.152.30
P/S (ttm):1.810.26N/A3.380.48

BKS = Barnes & Noble, Inc.
Pvt1 = Columbia House Company (privately held)
EBAY = eBay Inc.
Industry = Catalog & Mail Order Houses
1 = As of 2008

Below, we share a summary analysis we completed on eBay approximately one year ago, when the stock was at $26.75. You may notice that one of the bullets is similar to our j2 Global thesis: numerous competitive advantages protect high margin/ROIC business model. The numbers are NOT updated (if only we had more time), but the message remains the same:

eBay – World’s 6th Largest Retailer* is FCF Machine
* Based on information provided by eBay at 6/19/08 Shareholder meeting

Overview: eBay was founded in 1995 and provides global online marketplaces for the sale of goods/services (70% of 2007’s $7.7B net revenue), online payment services (25%), and online communications (5%)
  • Marketplaces: e-commerce segment that enables auction-style and fixed-price trading; also includes classifieds Websites, Rent.com, Shopping.com, Stubhub, and advertising services; available on localized sites in 28 countries
  • Payments: PayPal enables any party with an email address to securely send/receive payments in over 190 markets worldwide
  • Communications segment: SKYPE offers free global voice and video calling (on network) and low cost calling to landlines/mobiles; available in over 34 languages
  • Geographic revenue mix: 46% US / 54% International in 2Q08 versus 49% US / 51% International in 2Q07
Over past year, EBAY is down 27% versus the S&P500 down 11% and NASDAQ down 8%
  • Concerns about slowing growth for Marketplaces and platform changes, competition, macroeconomic conditions
  • P/E (2007A operating EPS) declined to 17x from 24x over same period versus three year TTM median of ~38x
However, numerous competitive advantages protect eBay’s high margin/ROIC business model
  • (1) Well-known brands with large customer base: eBay, PayPal, and SKYPE are becoming household names in many countries around world; 85M active Marketplaces accounts, 63M active PayPal users, and 338M SKYPE users
  • (2) Unparalleled scale and margin profile: 2007 “Gross Merchandise Volume” (total value traded) of $59B (+13% Y/Y) places the company as the number six global retailer, just behind CostCo and Target, ahead of Sears; no real estate value for eBay, but operating margins are ~25% (GAAP) and ~32% (adjusted); Amazon’s 2007 revenue was $15B with 6% OM (adjusted)
  • (3) Network effect: (1) and (2) drive (3) and are interrelated as eBay’s brand and broad reach yield incremental growth
  • (4) Strong financial position: no debt and net cash to capitalization of >40%; 2008E free cash flow of $2.0B
Estimated 2008 GAAP earnings of $1.44 for yield of 5.4% (6.4% operating EPS) with similar FCF yields; estimated 2009 earnings of $1.66 for yield of 6.2% (7.2%)
  • While historic multiples awarded during higher growth periods are unlikely (nor warranted), shares appear attractive given franchise characteristics that should command premium multiple; expect large share repurchases to continue -- $4.7B repurchased at average price of $30.48 over past two years, helping improve ROE/ROIC (17% / 28% for 2008E)

Happy investing,

Jeffrey Walkenhorst

Disclosure: long JCOM, EBAY.

© 2009 Jeffrey Walkenhorst
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1 comment:

  1. I Purchased ebay because of the potential Paypal growth story.


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