This year, eBay is going to make somewhere near $2.10 per share in profit, which amounts to somewhere near the $2.5 billion mark. This takes earnings back to the 2011 level due to the Paypal spinoff last July, though eBay has replaced the fast-growing Payal in its collection of subsidiaries with StubHub. The ticket exchange subsidiary, which reported revenue growth of 34%, currently represents $232 million of eBay’s overall $8.6 billion in annual revenues.
Because the corporate expenditures involve maintaining the integrity of the website, the company is able to report absolutely stunning 27% net profits of all expenditures. That $2.5 billion profit figure compared to $8.6 billion in revenues is a very impressive relationship that bodes well for shareholders because it suggests a large amount of current earnings can be extracted from the business for dividends or share repurchases without harming the competitive competition of the firm.
This is a stock that dipped below 20x earnings briefly during the financial crisis, and otherwise traded between 20x earnings and 40x earnings during the past decade. And yet, it reports stagnant revenues in the aftermath of the Paypal spinoff, and it suddenly gets labelled old tech and nobody wants it.
This is value investing in all its glory–you’re buying a very lucrative firm, it is growing profits, and the valuation is dirt cheap even though the financial press doesn’t give a hoot about the stock these days. A valuation of $23 per share compared to $2.10 per share in profits is a P/E ratio of 10.95x earnings.
That is a very solid 36% to 54% margin of safety if you conclude as I do that the proper valuation for the firm is 15x earnings to 17x earnings long term.
There is also a financial engineering angle–eBay has $5 billion in cash, and has reduced the share count from 1.4 billion to 1.18 billion over the past ten years for a cumulative share count reduction of 15.7%. At the current low price of $23, the share buyback would take out over 4% of the outstanding stock per year. eBay doesn’t pay a dividend–could you imagine if management decided to go into fall on buyback mode while the shares are cheap? It could use free cash flow to retire 8% of the stock if the current valuation holds. That expectation isn’t part of my analysis because eBay’s Board hasn’t indicated such opportunism nor is it a general trend in corporate America to do so, but it was the kind of thing that Dr. Henry Singleton did at Teledyne to deliver returns disproportionate to business performance.
The current analyst expectations for eBay is 5.5% revenue growth per share and 9.5% earnings growth per share (with core revenues nearly 3% and core earnings nearly 5% before including the effect of stock buybacks). That’s not a bad place to be–even if reality falls short of that, you can still do satisfactory when you buy a company like this at 10.95x earnings. The earnings and revenues are moving in the right direction on an annual basis, the buybacks add support and do create strong additional value if repurchased at this $23 price point, and the valuation has reached a point where the odds are heavily tilted in your favor. It’s become unglamorous on Wall Street, but therein lies the opportunity.