The Third Pig

Through The Noise eBay Is Still On Track

http://www.brickfinancial.com/thethirdpig/archive/2010/10/through_the_noise_ebay_is_stil.html

Posted by Ben Taylor on October 21, 2010 04:30 PM

Front yard of eBay
source: Flickr; Ryan Fanshaw Photography

eBay, Inc. reported yesterday and the market seems to have like what it heard. The stock is up over 8% day-over-day to $27. Paypal, the company’s online payment platform, continues to shine as its revenues grew 40% over the quarter-to-quarter. However the picture was not all rosey. The company’s main business, dubbed Marketplace, grew only 3%. If CEO John Donahue wants to meet his three year goals of turning this aspect of the business around, he has some work ahead of him.

With that, one quarter should not make or break a company. At least, we’d hope. So I thought I would check to see how eBay is performing compared to where I thought they’d be at this point. You may recall a post a few years back where I did a discounted cash flow analysis on eBay. At the time, the company was trading at about $30. I then said based on my projections of free cash flow, the company was actually worth $60. According to that analysis (here), eBay should have been producing free cash flow somewhere in the $2.2 to $2.7 billion range. Some three and half years later eBay reports free cash flow of $1.9 billion. This includes a one-time tax payment of $207.4 million related to a legal entity restructuring. If we were to add back the $207 million eBay would have a FCF of $2.2 billion.

So it seems my original analysis which had eBay at valued at approximately $60 in 2006 was a pretty decent estimation. The beauty is, eBay is cheaper than it was then, even after an 8% run up, at $27. If Paypal keeps chugging along and Donahue can get Marketplace on track, the analysis I did back in 2006 should remain valid.

Disclosure: I and the clients of Brick Financial Management, LLC owned shares in the companies or funds mentioned in this post at the time of this writing. But positions may change at any time.

Posted by Ben Taylor on October 21, 2010 04:30 PM

Disclaimer
The information contained on Brick Financial Management’s web site is solely for informational purposes and is not intended to be relied upon as a source of investment advice. While every effort has been made to offer the most current and correct information possible, inadvertent errors can occur. Although Brick Financial believes the information and data in this report were obtained from sources considered reliable and correct, we cannot guarantee their accuracy or completeness. No commentary that appears here, or any opinions expressed herein, should be construed as an offer to sell or a solicitation of an offer to acquire any securities or other investments mentioned herein. Persons associated with this firm may own or have an interest in securities or investments mentioned in this presentation. Their positions may change from time to time and they may buy or sell such securities or investments. Past returns are no guarantee of future performance.