June 9, 2014 - eBay: Buy It Now!
You may only think of EBAY when you win the auction and your package is on the way, but EBAY is a diverse company that has grown well beyond just auctioning off old and unique collectables into one of the world's most popular e-commerce sites. While it is still the top auction destination, more merchandise is being sold under the Buy-It-Now feature which grew 18% last quarter to now make up 76% of sales. Ebay has also moved beyond just auctions, as the company owns PayPal, Stub Hub, and other online businesses.
One famous investor who has invested a lot of money in Ebay is Carl Icahn. He has purchased 27 million shares at an average price of $55 which amounts to more than 2% of the company. Initially, Icahn started a campaign to spin off PayPal, feeling that separating PayPal from eBay would free up value for share holders. He felt the two companies, traded separately, would be worth more than one trading together. There were various meetings, and while things could always happen in the future, he has given up on the proxy battle. eBay and PayPal will stay as one company for now. There are still some plans in the works that they might float PayPal as a separate stock and still have EBAY in control of 80% of it.
EBAY stock is trading near $50 and has been in the $50-60 range over the last year. The stock made about $0.70 in the first quarter before it repatriated $6 billion in earnings causing earnings to come in at -1.82 a share. With $9 billion parked off shore, the company paid $3 billion in taxes to bring $6 billion home. The company is keeping that cash free for any activity it needs, whether an acquisition or more stock buybacks. The company bought back about $1.8 billion in shares and has $3.8 billion still authorized. Given the $65 billion market cap, that represents about 2.7% of outstanding stock bought back.
The company enabled $58 billion of commerce taking 7.3% of those sales as revenue in the first quarter. For 2014 the company expects revenue will come in near $18 to 18.5 billion up 12 to 15%. Earnings per share should climb 9-11% to $3.00 a share. eBay has been making money and should continue to make money, but high growth is just not there. In many ways eBay is more mature and growth is slower and harder for the company. Carl Icahn has bought in and he too realizes the value the company has. He has given up the proxy fight, but is holding on to his shares. There is the long term possibility that eBay will spin off PayPal generating some extra value, but in the short term that does not appear likely. If you are looking for a little extra you could consider going with a covered call. eBay still has many of those characteristics of a good long term hold, it just does not have high expectations for a huge growth rate.
Chart courtesy of stockcharts.com
The stock is trading at 50.45 with the October 50 call going for $3.30 a share. That means one can enter a buy write for 47.15 a share which will give the trade 6.5% downside protection, 6% assigned return and a 16% annualized (for comparison purposes only) return rate.
With Carl Icahn declaring peace, a breakup of PayPal seems less likely right now, but with him still on the board, there is a chance more value may be generated down the line. If you own EBAY stock you may want to put in a bid for some action on the covered call. The stock is not expected to move that much between now and then and you can pull in some extra premium on positions that might otherwise just be sitting around. Working the timing can be tricky, if a surprise announcement comes out and the stock jumps up the upside is capped at $50 for a 6% return. This position expires in October, and one would need to judge the likelihood on any new deal s at that point in time, then they can consider putting on new options or just holding the stock. While EBAY is still a solid stock, it has not risen a lot over the past year, so a covered call is one way an investor can pull a little more into a stock position and boost returns.