Jonathon Jacobson’s Highfields Capital buys a new stake in eBay

Market Realist

Highlights of Highfields Capital Management's positions in 1Q14 (Part 4 of 7)

(Continued from Part 3)

Highfields Capital Management and eBay

Highfields Capital started new positions in Monsanto Co. (MON), Teva Pharmaceutical (TEVA), eBay Inc. (EBAY), and Exxon Mobil (XOM). The top positions the fund sold were United Parcel Service (UPS) and FedEx Corp. (FDX).

The firm initiated a large new position in eBay Inc. (EBAY) that accounts for 2.31% of the fund’s 1Q 2014 portfolio.

eBay is a global technology company that enables commerce through three reportable segments: Marketplaces, Payments, and Enterprise. The Marketplaces segment includes the eBay.com platform, its localized counterparts, and its other online platforms such as online classifieds sites and StubHub. The Payments segment comprises PayPal and Bill Me Later. The Enterprise segment includes the company’s Magento business and provides commerce technologies, omnichannel operations, and marketing solutions for merchants of all sizes that operate in general merchandise categories.

Icahn ends his proxy war with eBay

Last month, activist investor Carl Icahn ended the proxy war with eBay. In a statement, the company said that Icahn is withdrawing both his proposal to separate the company’s PayPal business and his two nominees to the company’s board of directors. eBay said in its statement that it has agreed to Icahn’s suggestion to appoint business executive David Dorman as an independent director to its board. The statement noted Icahn still believes that “eBay would benefit from the separation of PayPal at some point in the near future and intends to continue to press my case through confidential discussions with the company.”

eBay recently announced the departure of PayPal president David Marcus, who has moved on to head Facebook’s messaging products.

1Q14 results reveal a huge tax charge

eBay shares tumbled following 1Q14 results due to a tax charge and a lower-than-expected outlook for the current quarter. eBay said the generally accepted accounting principles (or GAAP) effective tax rate for 1Q14 was 366%, compared to 16% for 1Q13. The company recorded a discrete tax charge of approximately $3 billion to facilitate the repatriation of approximately $6 billion net in foreign earnings. Management said, “The decision increases our available U.S. cash and enhances our financial flexibility.” They added that they need to “capitalize on opportunities as they arise” and mentioned a large stock buyback and acquisitions as some of the opportunities.

A report from Market Realist in May noted that eBay continues to post good results quarter after quarter, but the stock price hasn’t increased much. The company’s revenues grew 14% over the year to $4.26 billion—ahead of Wall Street’s expectations of $4.23 billion. The company’s earnings per share (or EPS) of $0.70 were also ahead of the market’s expectations of $0.67 for the quarter.

In terms of guidance, for full-year 2014, eBay expects revenue of $18 billion to $18.5 billion, representing growth of 12% to 15%. The company anticipates non-GAAP EPS of $2.95 to $3—growth of 9% to 11%. For full-year 2014, the non-GAAP tax rate is to be in the range of 20% to 21%. For 2Q14, revenue is expected in the range of $4.32 to $4.42 billion and non-GAAP EPS of $0.67 to $0.69.

eBay embarks on an aggressive buyback program

In 2013, eBay repurchased approximately $1.3 billion of its stock under a $2 billion buyback program announced in 2012. In January, eBay’s board authorized an additional $5 billion stock repurchase program. The company repurchased 33.1 million shares of its common stock for approximately $1.8 billion in 1Q14. As of March 31, 2014, the company’s remaining share repurchase authorization was $3.8 billion.

eBay said in a shareholder letter that as it competes in the $10 trillion commerce market, it believes the opportunity for dramatic growth for eBay and its shareholders is larger than ever before. Some of the most important trends in commerce—including online and offline convergence, mobile, social, data, the app economy, and evolving payment systems—align with eBay assets and position the company well for the future.

SunTrust analyst Robert Peck downgraded the stock earlier this month, saying, “With the activist no longer highlighting the value, we no longer see that as a catalyst to drive the stock higher.” He added that the $3 billion tax charge reduces the cash in “our sum of parts valuation.” Peck noted the “general multiples in the industry have been reduced, making near term operating outperformance the main driver of stock appreciation.” eBay faces competition from Amazon (AMZN), Google (GOOG), Facebook (FB), Apple (AAPL), and the e-commerce websites of brick-and-mortar retailers.

eBay sees a probe into customer data hacking

The company is facing an investigation by government agencies after asking its 145 million users to change their passwords when a cyber attack compromised a database containing encrypted passwords and other non-financial data. Wells Fargo reduced its price target over the cyber attack, and new updates to Google’s search algorithms have led to a decline in eBay’s search traffic. On the security breach, Wells Fargo said eBay “faces some near-term risk of customer churn.” Wells Fargo’s analysis cited Channel Advisor data and said that eBay’s “search rank had dropped by 3.88 places” and that “this could drive lower traffic to the site for the foreseeable future.”

Continue to Part 5

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