EBay(EBAY)                                                                               Fu sang Leung
Date:              ...
Company Summary

EBay is a world’s online marketplace for sales of goods and services since 1995; the way they run the bus...
In conclusion, EBay outperform its competitors by providing a safer and more secure trading environment
for its users, in ...
I. Fundamental Valuation
eBay                    PARAMETERS                              FY1         FY2       Ltg
as of 1...
II. Relative Valuation
Comparables
                                                                         Mean FY2
     ...
III. Technical Analysis




                          6
Indicator                                                 Interpretation
Bollinger Bands   Neutral – It is in the middle o...
IV. Earnings Analysis
                                                Earnings Surprises
                        Sep-05   ...
V. Analysts’ Recommendations
                    Current                 1 Month Ago         2 Months Ago          1 Year ...
VI. Institutional Ownership

                                       # of Holders        % Beg. Holders            Shares  ...
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Ebay 1

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Transcript of "Ebay 1"

  1. 1. EBay(EBAY) Fu sang Leung Date: October 21, 2005 Consensus Estimate 9/05 12/05 12/06 Sector: Consumer Services EPS 0.69 0.84 1.01 Industry: General retailers P/E 58.64 46.77 38.90 Current Price: $38.43 Long Term Growth Rate: 29.26% 52 Wk Price Range: $30.78-$59.21 Ratio Analysis Co. Indus. Sector SP500 Ave. Daily Vol: 16,730,000 P/E (TTM) 58.64 31.86 24.63 19.91 Beta: 2.2 P/S (TTM) 14.19 4.50 2.68 2.81 Market Cap ($million): 53,190 P/B (MRQ) 7.10 4.76 3.52 3.77 Shares Out (million): 1,345 ROA (TTM) 11.81 10.58 5.52 7.53 Inst. Hold %: 61.30% EBO Valuation $10.98 Div Yld: NA Recommendation: HOLD Total Debt/Equity: 0.00 Stop-loss Price: $31.30 Member S&P 500? Yes Price 6-mo prob 12-mo prob Target Price $47.14 53% 66% Investment Thesis Summary Fundamental Valuation: • Most of the indicators are positive/neutral. Negative – Based on a discount rate of 14.22%, Although EBay’s EBO valuation is only $10.98 EBay’s EBO valuation is only one quarter (caused by a high beta), the stock seems to be ($10.98) of its current price. It is mainly caused undervalued. by the high beta. • Shipping costs become higher because of the Relative Valuation: high fuel prices; it could seriously affect the Positive/Neutral – Due to the lack of data from company’s earning. two competitors, this does not tell much about the company. • Significant increase in revenue and EPS over the Technical Analysis: last two quarters may not be fully reflected in the Positive/Neutral – Most of the indicators imply stock price yet. an increase in stock price in the future. • Some of the analysts had just upgraded the stock Earnings Analysis: to outperform. Positive/Neutral – Positive earning surprises. Many revisions over the last week, and it could • Recent acquisition of Skype and shopping.com be caused by some exciting news from the may likely to increase the company’s future company. earnings, and it also introduces EBay to more potential users. Analyst Recommendations: Positive – Not much change over the last year, • EBay is trying to expand its market by acquiring but overall it is a “buy” or “Hold” more well-known shopping sites from all over recommendation. the world; and that would certainly increase its future earnings. Institutional Ownership: Positive/Neutral – Both the total percentage of • A possible plan of stock repurchase in the near shares hold by the institutions and the total future indicates the stock could be undervalued. number of net buyers are almost the same as the beginning position. 1
  2. 2. Company Summary EBay is a world’s online marketplace for sales of goods and services since 1995; the way they run the business is to create an auction environment for their buyers and sellers from all over the world, then it becomes very successful and making EBay one of the most popular shopping website in the internet. Unlike other search engine website; EBay actually makes most of the money by charging transaction fees that accounts for about ninety-seven percent of its revenue, and earns about three percent of the revenue from companies which post an advertisement on their website and other. The break-down for last year revenue is showed below (dollars in millions). Catagories Operating Revenue % Transaction revenues from U.S. Market place 1,338,715 41% Transaction revenues from international Market place 1,157,472 35% Payment 680,813 21% Revenue from advertisement and others 105,037 3% Total 3,271,309 100% Competition and Strategy EBay’s strategy is to act as a middleman for all the potential buyers and sellers to trade about anything they want or need without geographic limitations, also providing a lower price and safer trade possible for its users. In order to give its customers’ confidence in using their website, they provide a service called PayPal, which is a fast, easy, private and safe method for transaction between customers through electronic mails. Besides, different software has been created by the company to fulfill the need of their customers, such as selling manager Pro and shipping calculator. Overall, the company is trying to differential itself from the competitors by offering a safe, time-saving and efficient market place; and also the most satisfied experience comparing to all the virtual market place. Most of the competitors such as Yahoo, Google, Amazon and Overstock do not provide a market place which is as wide as EBay, they are either having narrow scope in their product lines or mainly focus on certain product lines. To better compete with others, EBay create quite a few of website to concentrate on certain product lines. Half.com which competes directly to Amazon and Overstock in their books, music and movie categories. Yahoo and Google are mainly a search engine based website which provide their users to search for information, and the main income for these two company is from the advertisement charges, and only a small portion of the revenue comes the transactions fees charged for shopping on its website. On the other hand, EBay has less concern of the advertisement income since it is originally established as a virtual market place which focuses on charging transaction fees. For both Amazon and Overstock are very similar to EBay in term of their way of making money, and they compete mainly on offering the cheapest and best quality of products; most of the time, they compete in giving a lowest or free shipping fees if buyer purchase a certain amount of products. For example, Overstock charges shipping fees of 2.95 for all products. Amazon charges according to the products and the weights, it starts from 2.49 up to 4.49 + 0.5/lb for standard delivery, whereas EBay collects from 2.79 for most of the products. Due to the increase in fuel prices, all the internet retailer companies may be forced to increase its shipping fees in the future, and it could cause a big impact on their earnings since the number of transactions may decrease because of that. 2
  3. 3. In conclusion, EBay outperform its competitors by providing a safer and more secure trading environment for its users, in additional of lowest transactions and shipping fees possible. Keep upgrading their system in order to attract more users for its website, so shoppers could easily find what they want in a less time consuming way. Historical Revenue and Earnings: Historical Revenue Historical Earnings FY 12/05 FY 12/04 FY 12/03 FY 12/05 FY 12/04 FY 12/03 1st Quarter 1,031.7 756.2 476.5 0.19 0.15 0.08 2nd Quarter 1,086.3 773.4 509.3 0.21 0.14 0.07 3rd Quarter 805.9 530.9 0.14 0.09 4th Quarter 935.8 684.4 0.15 0.11 Total 2,118.0 3,271.3 2,165.1 0.40 0.58 0.35 From the information above, eBay Company has been doing excellent in the first two quarters of this year. Both revenue and earnings keep increasing since 12/03; it indicates that eBay Company tried very hard to improve itself, and that could turn out to be a substantial growth rate in the future. 3
  4. 4. I. Fundamental Valuation eBay PARAMETERS FY1 FY2 Ltg as of 10/21/05 EPS Forecasts 0.84 1.01 29.26% Model 1: 12-year forecasting horizon (T=12). Book value/share (last fye) 5.03 and a 7-year growth period. Discount Rate 14.22% Dividend Payout Ratio 0.00% Next Fsc Year end 2005 Current Fsc Mth (1 to 12) 11 Target ROE (industry avg.) 15.53% Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Long-term EPS Growth Rate (Ltg) 0.2926 0.2926 0.2926 0.2926 0.2926 Forecasted EPS 0.84 1.01 1.31 1.69 2.18 2.82 3.64 Beg. of year BV/Shr 5.030 5.870 6.880 8.186 9.873 12.054 14.874 Implied ROE 0.172 0.190 0.206 0.221 0.234 0.245 ROE (Beg. ROE, from EPS forecasts) 0.167 0.172 0.190 0.206 0.221 0.234 0.245 0.227 0.209 0.191 0.173 0.155 Abnormal ROE (ROE-r) 0.025 0.030 0.048 0.064 0.079 0.092 0.103 0.085 0.067 0.049 0.031 0.013 growth rate for B (1-k)*(ROEt-1) 0.000 0.167 0.172 0.190 0.206 0.221 0.234 0.245 0.227 0.209 0.191 0.173 Compounded growth 1.000 1.167 1.368 1.627 1.963 2.396 2.957 3.682 4.518 5.462 6.507 7.634 growth*AROE 0.025 0.035 0.065 0.104 0.155 0.220 0.304 0.313 0.302 0.268 0.202 0.100 required rate (r) 0.142 0.142 0.142 0.142 0.142 0.142 0.142 0.142 0.142 0.142 0.142 0.142 0.142 discount rate 1.142 1.305 1.490 1.702 1.944 2.221 2.536 2.897 3.309 3.779 4.317 4.931 div. payout rate (k) 0.000 Add to P/B PV(growth*AROE) 0.02 0.03 0.04 0.06 0.08 0.10 0.12 0.11 0.09 0.07 0.05 0.02 Cum P/B 1.02 1.05 1.09 1.15 1.23 1.33 1.45 1.56 1.65 1.72 1.77 1.79 Add: Perpetuity beyond current yr (Assume this yr's AROE forever) 0.15 0.19 0.31 0.43 0.56 0.70 0.84 0.76 0.64 0.50 0.33 0.14 Total P/B (P/B if we stop est. this period) 1.17 1.24 1.40 1.58 1.79 2.03 2.29 2.32 2.29 2.22 2.10 1.93 Implied price 6.68 7.03 7.95 9.00 10.19 11.53 13.05 13.18 13.04 12.62 11.93 10.98 Check: Beg. BV/Shr 5.03 5.87 6.88 8.19 9.87 12.05 14.87 18.52 22.72 27.48 32.73 38.40 Implied EPS 0.84 1.01 1.31 1.69 2.18 2.82 3.64 4.21 4.75 5.25 5.67 5.96 Implied EPS growth 0.202 0.293 0.293 0.293 0.293 0.293 0.154 0.130 0.105 0.079 0.052 Inputs: 1. EPS Forecasts and long-term growth rate (LTG) are Reuters(10/21/05). 2. Book value per share derived from 12/31/04 balance sheet. Total equity = 6728.3M, common stock outstanding = 1338.61M implying BVPS= 6728.3/1338.61 = $5.03 3. Discount rate: Used 20 year T-bond rate of 4.65% for risk-free rate, an expected return on the market of 9.0%, and eBay’s beta estimated as 2.2 (from MSN) yielding a CAPM discount rate of 14.22% (=0.0465+2.2 (0.090-0.0465)). 4. Dividend payout ratio is 0.00% which reported by Reuters. 5. Next fiscal year-end is 2005 6. Current fiscal month is 10(October) 7. Target ROE= 15.53%, it reported by Reuters. Output and Sensitivity Analysis: 1. Based on these parameters, a 12 year forecasting horizon and a 7 year growth period, the EBO valuation is $10.98 2. Changing the discount rate to 8% (-6.66%), the EBO valuation is $34.10. It is much closer to the current price of $39.29. 3. Changing the growth rate to 44.26% (+15%), the EBO valuation is $16.88. 4. Changing the industry ROE to 30% (+14.47%), the EBO valuation is $26.54. By inserting 14.22% into the model, the EBO price turns out to be one quarter of the current price of $39.29. The stock seems to be very much overvalued. However, the implied price become very close to the current price when plugging 8% into the discount rate; and that explains the discount rate should be more like 8%. 4
  5. 5. II. Relative Valuation Comparables Mean FY2 Earnings Estimate Forward Mean LT PEG P/B ROE Value Ticker Name Mkt Cap Current Price (next fiscal year) P/E Growth Rate (MRQ) 5 yr ave Ratio P/S AMZN AMAZON 16,040 38.95 1.01 38.56 21.84% 1.77 NA NA #VALUE! 2.06 GOOG GOOGLE 100,020 358.17 8.39 42.69 35.90% 1.19 11.38 NA #VALUE! 19.60 YHOO YAHOO 50,130 35.58 0.75 47.44 29..55% #VALUE! 7.07 5.32% 1.33 10.90 OSTK OVERSTOCK 622.14 33.28 -0.20 -166.40 40.63% -4.10 5.92 -58.95% -0.10 1.02 EBAY EBAY 53,190 38.43 1.01 38.05 29.26% 1.30 6.51 9.31% 0.70 12.78 Implied Price based on: P/E PEG P/B Value P/S AMZN AMAZON $38.95 $52.18 #VALUE! #VALUE! $6.19 GOOG GOOGLE $43.12 $35.14 $67.18 #VALUE! $58.94 YHOO YAHOO $47.91 #VALUE! $41.74 $73.04 $32.78 OSTK OVERSTOCK ($168.06) -$121.03 $34.95 -$5.52 $3.07 High $47.91 #VALUE! #VALUE! #VALUE! $58.94 Low -$168.06 #VALUE! #VALUE! #VALUE! $3.07 Median $41.03 #VALUE! #VALUE! #VALUE! $19.49 Indicator Interpretation P/E Bullish – The lowest among its competitors. It could mean the stock is undervalued, higher risk, or lower expected growth rate. PEG (P/E/G) Bullish – It is the lowest of its competitors, and that implies the stock is undervalued or higher risk. P/B Neutral/Bullish – In the middle of its competitors, but way below Google. It could mean that the stock is undervalued, low ROE, or risky. Value (P/B/ROE) Neutral/Bearish – ROE is a lot lower than yahoo, but it is hard to compare since there is no ROE from Google and Amazon because they have not yet been around for long enough. P/S Neutral – In the middle of its competitors. Summary EBay is an internet retailer which does not have many direct competitors, and I found other four companies that are “suitable” to compare with. Furthermore, two out of these four companies are not in the market long enough to show a five year average, so I believe that these relative valuations do not really show a lot in comparison. Overall, EBay is mostly undervalued and riskier than its competitors. 5
  6. 6. III. Technical Analysis 6
  7. 7. Indicator Interpretation Bollinger Bands Neutral – It is in the middle of the upper band and lower band, it does not indicate that there would be a move in the near future. Stochastics Neutral/Bearish – %k = 51.79 < %d = 59.90. Since %k = 51.79 is right in the middle of its trading range, it is neutral. Moving Averages Neutral – Price is almost the same as the 25 day moving average and the 50 day moving average. MACD Bearish – Negative MACD. Besides, short term MA is lower than the long term MA. Regression Bullish – Upward trend. It shows divergence when price is quite below the line. PriceROC Bullish – I-point is greater than 0. It means price is higher than 100 days ago. 7
  8. 8. IV. Earnings Analysis Earnings Surprises Sep-05 Jun-05 Mar-05 Dec-04 Sep-04 (Last qtr) (2 qtrs prior) (3 qtrs prior) (4 qtrs prior) (5 qtrs prior) Estimate 0.20 0.18 0.18 0.17 0.14 Actual 0.20 0.22 0.20 0.17 0.14 Difference 0.00 0.04 0.02 0.00 0.00 Mean Earnings Estimates Dec-05 Mar-06 Dec-05 Dec-06 LT Growth This Quarter Next Quarter This Fiscal Year Next Fiscal Yr Rate Earnings 0.22 0.24 0.84 1.01 29.26 # Estimates 25 8 25 26 13 Earnings Per Share Estimates Revisions Summary Last Week Last 4 Weeks Revised Up Revised Down Revised Up Revised Down Quarter ending 12/05 3 8 3 7 Quarter ending 03/06 1 2 1 2 Year ending 12/05 9 5 13 4 Year ending 12/06 4 15 4 17 In general, eBay Company stays really close to the analyst’s estimation. The company has been performing as the analysts would have expected. This could also mean that the stock price will not have a big movement in the near future, or even it does, that would be an increase in stock price since the earnings surprises is not an negative. According to the analyst’s estimation, eBay Company will have annual earnings of $0.84 per share at the end of this year if the forecast is good. It is a very reasonable estimation since the earnings in pervious years have been increasing. There are a lot of revisions in the last week and the last four week; those included both positive and negative revisions. The company has certainly become the focus point of attention, and it could mean that the stock is very risky in nature, or EBay Company has some exciting news recently. 8
  9. 9. V. Analysts’ Recommendations Current 1 Month Ago 2 Months Ago 1 Year Ago Buy 6 6 6 6 Outperform 7 7 9 8 Hold 11 11 9 11 Underperform 1 1 1 0 Sell 1 1 1 1 No Opinion 1 1 1 0 Mean Rating 2.38 2.38 2.31 2.31 It should be no surprise that analysts would encourage people to buy or hold the stock since all the data comes from the company has been great up to date. The company’s performance has been keeping up with the analysts’ estimation, and it really gives people confidence in the stock. However, the current mean rating has not changed a lot from a year ago; this could mean that analysts are not really excited about the stock. Overall, it is a neutral indicator. 9
  10. 10. VI. Institutional Ownership # of Holders % Beg. Holders Shares % Shares Shares Outstanding 1,355,081,188 100.00% Total Positions 640 105.79% 830,664,768 61.30% New Positions 99 16.36% 15,828,921 1.17% Soldout Positions 70 11.57% -30,317,476 -2.24% Buyers 345 57.02% 104,731,392 7.73% Sellers 310 51.24% -108,630,360 -8.02% Beg. Total Inst. Positions 605 100.00% 834,563,736 61.59% # Net Buyers/3 Mo. Net Chg. 35 5.79% -3,898,968 -0.29% The total number of net buyers has only increased by 35, and the total percentage of shares holding by the institution is about the same as beginning position. It states that about the same number of institutions in both side of buying and selling position, that implies some institutions believe that the stock would have an above the average performance in the future. Overall, it is a neutral indicator. 10

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