Ebay reported full year free cash flow of $2.32 billion. This is in line with their previous forecasts. EBAY is one of the cheapest wide moat stocks out there right now. Its got a fortress-like balance sheet with over $3 billion in liquid cash. EBAY is selling now for a depressed price of 5.3X TTM FCF. These levels are unheard of for Ebay and suggest the company is headed for bankruptcy or that their business model is broken.
EBAY is cheap even if we assume their FCF drops 50%. However, this is very unlikely as Paypal is growing 20% YoY, enabling all of Ebay to at least grow 7%. The TDBU portfolio bought more Ebay stock today, as it irrationally dropped due to missing the headline EPS forecasts. The following is Ebay's CEO, John Donahoe,from the recent conference call:
We still have a lot of work to do in our core eBay business. Our priorities are on making eBay safer and easier to use and improving value and selection remain consistent for 2009. We are making the necessary changes, tough changes, and we are doing so with focus and conviction. At the same time we have a powerful portfolio, one that I frankly believe is not fully credited in the value of the Company. And during 2009 PayPal, Bill Me Later, advertising, classifieds, StubHubs and our other businesses will continue to contribute more revenue, more earnings and more opportunities as we grow, scale and diversify the ways in which we connect buyers and sellers and monetize traffic. We are the global e-commerce leader and we intend to maintain and extend that position. The macro economic environment will continue to be extremely challenging in 2009, and we plan conservatively. But tough times create opportunities for strong companies to get stronger and we intend to do just that in 2009.
I agree with the CEO. Hopefully we can start seeing a bigger ramp up in share repurchases. They repurchased $2.2 billion in stock in 2008 and currently have $656 million in repurchases authorized. At these prices, they should be retiring stock at a tremendous rate, as they are only paying 5.3X FCF and already have a rock solid balance sheet.
A major risk with EBAY is that they will over-pay for acquisitions like they did with Skype. However, I believe Donahoe is much more fiscally conservative than Meg Whitman and will spend the cash flow wisely. Ebays acquisitions seem to be growing very fast and should add growth to their slowing auction business.
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