When times were flush many internet related stocks were in high demand despite outrageously excessive share prices. Now, with the economy in a serious funk, these same companies are trading near their lowest absolute and relative prices ever.
With credit expensive and hard to come by, I've narrowed my field to solidly profitable companies with little to no debt and lots of treasury cash. I also want a firm that serves a thriving area of the economy even in today's depressed state of affairs.
Which former high-flier now looks like a great bargain?
eBay (EBAY) Nov. 26, 2008 close: $13.48
52-week range: $10.91 (11/21/08) - $35.12 (12/11/07)
eBay owns its namesake internet auction marketplace as well as PayPal - its global payment platform and Skype - its net-to-phone communications company. Since coming public in 1998 the sales, cash flow, earnings and book value have all increased exponentially. The shares peaked in late 2004 at a ridiculous price of $59.20 on trailing earnings that year of $0.57 and an absurd P/E of 104x.
Wednesday, EBAY shares closed at $13.48 or just 9.3x 2008's expected EPS of $1.48. How have the numbers looked since 2000? Here are the per share stats [as reported by Value Line]:
Year……..….Rev…….…C/F…….…B/V……..….EPS ……Avg. P/E
2000 ………$0.40 ……..$0.08 …….$0.94 ……....$0.04 …… 500x
2001 ………$0.68 ……..$0.16 …… $1.29 ………$0.08 …… 62x
2002 ………$0.98 ……..$0.21 …… $2.86 ………$0.21 …… 69x
2003 ……... $1.67 ……..$0.34 …… $3.77 ………$0.34 …… 73x
2004 ……... $2.44 ……..$0.77 …… $5.03 ………$0.57 …… 75x
2005 ………$3.24 ……..$1.04 …… $7.16 ………$0.78 …… 51x
2006 ………$4.36 ……..$1.22 …… $7.97 ………$0.79 …… 42x
2007 ………$5.68 ……..$1.66 …… $8.67 ………$1.19 …… 28x
2008* …. …$6.85 ……..$1.95 …… $8.35 ………$1.48 …… 19x
*2008 numbers include consensus estimates for Q4.
Over the past 8 years revenues jumped by 1612%, Cash flow was + 2337%, book value increased 788% and EPS surged by 3600%. Those are not misprints! Despite those great growth numbers today's mind-numbing market environment is now offering up EBAY shares are under 10x trailing earnings.
How's the balance sheet? As of September 30, 2008 the company had zero debt and $3.643 billion in cash. Value Line assigns an "A+" financial strength rating to EBAY.
Even presuming slower future growth rates and a much more modest than typical valuation I could see EBAY shares trading at 20 times the now consensus estimate for 2009 of $1.43 /share. That leads me to a 12 – 15 month target price of $28.60 or 112% above the current quote.
Is that a crazy goal? Only in being, perhaps, too conservative. These shares hit peak share prices of $32.40 - $58.90 in each calendar year 2003 through 2008 all on fundamentals that were well below today's levels. The absolute lows in those same years never came in below $22.80 - $31.20 (excepting the past 6 weeks).
The poor economic conditions may well lead to more people selling unwanted items on eBay to raise cash and PayPal has proven to be a tremendous moneymaker since their acquisition in 2002.
EBAY shares represent the most favorable valuation in their 10-year trading history. They are immune from the credit market crisis due their lack of debt, high cash holdings and tremendous free cash flow generation. Capital spending for 2008 is likely to come in at just around 23% of cash flow.
Value Line sees EBAY earning $1.85 /share over the next 3 – 5 years and commanding a 30 multiple by then for a 2011 – 2013 mid-point target of $55.50. I'm hoping for a least a double by the end of 2009.
Disclosure: Author recently purchased, and now holds, EBAY shares.
