- By Robert Abbott
There's change going on at eBay Inc. (NASDAQ:EBAY), and lots of it. According to the second quarter 2020 earnings report, changes included:
Founder Pierre Omidyar, who started eBay in 1995, gave up his seat as a director earlier this month and now is simply a director emeritus, an honorific title.
At the end of July, its operating agreement with Paypal (NASDAQ:PYPL) expired (Paypal was spun off from eBay in 2015), opening the door for eBay to scale its own managed payment system globally.
It transferred its Classifieds business to Adevinta (ADE) for a consideration that totaled about $9.2 billion. Adevinta shares are part of the deal, and eBay will own about 33% of the other company once the deal is finalized.
Some of these changes were first advocated by the activist fund Elliott Management, which raised them in a letter to the Board of Directors on Jan. 22, 2019.
Managed payments is expected to be a big growth area for the company now that it is no longer contractually bound with Paypal. According to CEO Jamie Iannone, it should produce $2 billion in revenue and $500 million in operating income in 2022. By adding Google Pay from Alphabet (NASDAQ:GOOG) and Apple Pay from Apple (NASDAQ:AAPL) to some of its European platforms, it expects to push up Marketplace revenues.
Given all of these changes, could eBay be a good investment opportunity? Let's look at the fundamentals.
As the top lines on the table suggest, eBay has increased its debt, with the red bars under history telling us that debt is more of an issue now than it has been in the past.
The company offers this information about its debt guidelines: "Targeting mid-term leverage of approximately 1.5x net debt and gross debt below 3.0x EBITDA". It also provided this graph showing the relationship between cash and debt:
We are also given some reassurance by the interest coverage ratio at 10.2. That's weaker than in the past, but still indicates eBay is producing much more than enough operating income to cover its interest expenses.
The Piotroski F-Score is in the financially-stable range, while the Altman Z-Score tells us the company is safe from bankruptcy.
Return on invested capital (ROIC) at 14% is about double the weighted average cost of capital (WACC), showing that management is allocating its capital effectively and efficiently.
Margins are a big part of profitability, and both are in good standing now. But, as this 10-year chart shows, the net margin has been quite unpredictable in the past:
Note that this chart only runs to the end of 2019, providing different data than the table above.
The sky-high return on equity also needs a clarification; the number in the table shows a result for just the second quarter. The 10-year median ROE stands at 13.24.
The last three line items, denoting average annual growth over the past three years, shows that revenue grew nicely, but the two profitability measures, Ebitda and earnings per share, are both down:
The three-year revenue growth rate of 15.8% is slightly below its 10-year median of 16.95%.
The three-year Ebitda growth rate of -2.1% compares unfavorably with a 10-year median of 21.05%.
The three-year earnings per share without non-recurring items growth rate of -30.9% compared negatively with the 10-year median of 32.3%.
After a brief investigation, I could find no exceptional explanation for the wide variations in Ebitda and earnings per share.
According to the GF Value infographic, eBay is fairly valued; that also means there is no margin of safety. As this three-year chart shows, the current price is not far off a recent high:
The price-earnings ratio is 7.63, which is about two points below the 10-year median. The PEG ratio at 2.56 suggests the stock is overvalued (1.0 is considered fair value). The discounted cash flow (DCF) valuation is not shown because it is based on a predictability rating of just 1 out of 5.
The GF Value Line would seem to the best bet here; it is based on four price multiples, a proprietary adjustment factor and an estimate of future business performance.
Dividend and share buybacks
eBay began paying a dividend in the first quarter of last year, at $0.14 per share. This year the rate was bumped up to $0.16 per share.
That gives it a dividend yield of 1.24% and a dividend payout ratio of 22%. The forward dividend yield is 1.28%, reflecting that increase at the beginning of this year.
The five-year yield-on-cost is the same as the current dividend yield, at 1.24%. However, we shouldn't take that to mean eBay does not intend to raise the dividend. Instead, I think of it as a statistical anomaly brought about because there is little history of dividend data.
With a share buyback ratio of 9.9, eBay has been repurchasing its own shares swiftly. This 10-year chart shows the effect this has had on shares outstanding (to the end of 2019):
This represents a 35% reduction in the number of shares outstanding. The buybacks are expected to continue, with the company stating in its Q2 2020 guidance that it expected to repurchase another $4.5 billion worth of shares this year.
eBay has attracted the wallets of 18 guru investors, but recently the gurus have done little buying and selling in the stock:
Seth Klarman (Trades, Portfolio) of The Baupost Group held the largest volume of shares at the end of the second quarter, 32,086,000, representing 4.58% of eBay's capital and 21.08% of his firm's assets.
Jim Simons (Trades, Portfolio) of Renaissance Technologies was the only one of the top three guru owners to change his stake in the quarter. He added 6.32% to end up with 13,279,334 shares on June 30. Paul Singer (Trades, Portfolio) of Elliott Management (the activist firm that recommended changes to the board of directors) finished the quarter with 9,900,000 shares representing 1.24 % of eBay's capital.
eBay is a solid, well-managed company, albeit with a significant amount of debt. It also has a strategy to keep growing the company in coming years and appears to be well-positioned to execute on the plan.
The company has reasonable financial strength, good profitability and appears to be fairly valued at its current price. The dividend is small, but we must remember it just began paying it last year, while the buyback history is strong, thus spreading the earnings among an ever-smaller number of shares. There is strong representation from the guru community.
Value investors will not give eBay much attention because of the debt and lack of a margin of safety. Income investors will find nothing here to keep funds flowing in. Growth investors might see the current dip as an entry point for a stock that has roared back since the March selloff.
Disclosure: I do not own shares in any of the companies named in this article.
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This article first appeared on GuruFocus.