eBay Q4 2013: Icahn wants to spin-off Paypal
eBay (NASDAQ:EBAY), the biggest online marketplace, released its Q4 2013 results on Jan 22 after market close. Carl Icahn’s proposal for a spin-off found a special mention in the earnings release as well as the conference call. More on the proposal follows below. First the numbers, EBAY stock gained close to 1% in the regular trading session on Jan 23, following an earnings surprise for Q4 2013. However, the company lowered its future estimates leading to 2015.
eBay: Q4 2013 performance
The company reported a revenue growth of 14% over Q4 2012 with payments segment driving the growth with a Y/Y growth rate of 19.3%. While marketplaces continued to expand, the enterprise segment registered a revenue decline of 1.5% Y/Y. The chart below shows eBay’s revenue composition in Q4 2013 compared against Q4 2012.
The table below summarizes eBay’s performance in Q4 2013 compared to Q4 2012.
|Q4 2012||Q4 2013||YoY Change|
|Net Income Margin||18.83%||18.78%||-0.05%|
|Non-GAAP Earnings per Share||0.70||0.81||15.7%|
The company’s revenue growth of 13.5% came in just lower than the company’s midpoint guidance and analyst estimates of 14%. However the company reported Non-GAAP earnings at the top end of the guidance midpoint, beating estimates of 80 cents earnings per share by a single cent. The marginally higher earnings was a direct result of company’s share repurchase program, which saw the number of shares reduce by 8 million over the year ago quarter. The overall performance of the company was along expected lines with no surprises springing forth.
The other important developments in the quarter saw activist investor Carl Icahn, with a 0.82% stake in eBay, file a proposal to spin off the payments segment and marketplaces segment. The proposal was strongly opposed by the management. We think the management’s decision to continue with the unified operations is justified considering the synergy which the two divisions currently generate. The two complement each other making eBay’s services a complete commerce ecosystem. However knowing the activist in Icahn, we expect a showdown in the coming months. The management addressed Icahn’s proposal stating, “eBay's Board of Directors has concluded that the company and its shareholders are best served by the current strategic direction of the company and does not believe that breaking up the company is the best way to maximize shareholder value. As part of eBay Inc., PayPal is able to leverage the company's technology capabilities, commerce platforms and relationships with retailers, brands and large merchants worldwide. As part of eBay, PayPal drives commerce innovation in payments at global scale, creating value for consumers, merchants and shareholders. (sic.)” The management is clear that they want to keep the two services together for now.
The company announced a $5 billion share repurchase program in addition to the current $600 million remaining under the previous repurchase program. The outstanding repurchase authorization of $5.6 billion represents close to 7% of eBay’s current market capitalization and will help drive the future earnings per share to that extent. The company ended the year with a Cash cash equivalents balance of about $9 billion.
The company came out with guidance for the first quarter of 2014 in addition to Full year guidance for 2014 and 2015. The future guidance provided is given below.
|Earnings per Share (EPS)||0.66||2.98||3.27|
|EPS growth YoY||4.8%||9.8%||10.0%|
The values in the table are derived based on the midpoints of the ranges given by the management. As per the midpoint of the ranges given out by the management, the company will grow earnings at an average rate of 9.9% over the next two years. We now take a look at the company’s valuation based on the guidance provided by the management.
|Current stock price||$54.94|
|2015 Estimated Earnings||$3.27|
|2 year EPS Growth||9.9%|
|2 year forward P/E ratio||16.79|
|Target price at P/E of 20||$65.45|
The company has a two year forward P/E ratio of 16.79, based on the EPS estimate of $3.27 for 2015. Using a forward P/E of 20x 2015 earnings gives us a target price of $65.45, which represents a gain of 19% over the closing price on Jan 23, 2013. We hold a positive long term outlook on EBAY stock.
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