Beware Of eBay's Drop In EPS

| About: eBay Inc. (EBAY)

Although many investors pay close attention to the bottom line number when earnings are reported, this number can often be misleading. Net income and earnings per share can be drastically affected by differing accounting methods used for depreciation, amortization, restructuring charges, goodwill impairment, and asset sales to name a few. Other than depreciation and amortization, most irregular income statement line items are one time charges and should not be factored into your analysis of the particular company. When pulling data off many finance websites, you will be viewing "as reported" numbers and this may not reflect the true growth of a company.

One of the most popular stocks in today's market is eBay (NASDAQ:EBAY). Investors who glance at earnings per share from major finance websites may be scratching their heads when eBay reports Q4 earnings. Using data from Yahoo Finance, eBay currently has trailing twelve month diluted earnings per share of $2.93. You can also see a trailing P/E of just 17x earnings, not bad for a fast growing tech company. Assuming you use this data and factor in a conservative earnings per share growth rate of 20%, you would expect last year's earnings of $2.46 to grow to $2.95. Why not load up the boat in this undervalued security?

Do your Homework

The type of five minute financial analysis mentioned above is what leads investors to make poor decisions time and time again. If you take time to read the company's financial statements in detail, especially the footnotes at the bottom of the companies 2011 10-k, you would see the following statement:

The Consolidated Statement of Income for the year ended December 31, 2011 includes a loss on divested business of $256.5 million and a gain on the sale of our remaining 30% equity interest in Skype of approximately $1.7 billion . See "Note 3 - Business Combinations" and "Note 4 - Skype Related Transactions" to the consolidated financial statements included in this report.

eBay took a gain from the sale of Skype during the last quarter of 2011 and included it as a gain on their income statement. This is appropriate accounting, no red flags being waved here, but by not factoring this "one time item" into your analysis, your data will be drastically skewed. Looking back to the 2009 10-k filing and you see a similar footnote:

The Consolidated Statement of Income for the year ended December 31, 2009 includes a $343.2 million charge related to the settlement of a lawsuit between Skype, Joltid and entities controlled by Joltid's founders and a $1.4 billion gain on the sale of Skype. See "Note 4 - Skype Related Transactions" to the consolidated financial statements included in this report.


Below is my adjusted data for eBay's income statements in 2009 and 2011. As you can see I subtracted the non-recurring items mentioned above, and added back in the taxes that would have been paid from these long term gains. We now have an idea of how eBay's core businesses are performing. This data compares with reported diluted earnings per share of $2.46 in 2011 and $1.83 in 2009.



Operating Income



Interest & Other



Income Before Tax



Non-recurring items



Actual Income Before Tax



Tax Savings 15% LT



Actual Taxes



Adjusted Net Income



Diluted EPS



Source: eBay SEC Filings and my adjusted results

As of the company's third quarter earnings announcement, management provided full year diluted EPS guidance of between $1.95-$1.99. By taking the time to read through eBay's 8-k filing, you may have picked up on the TTM EPS drop.

Valuation Changes

The table below shows diluted EPS as reported and diluted EPS factoring in my adjustments. The adjusted results paint a much clearer picture of how the core businesses of eBay are actually performing.





2012 (unfinished)







Adjusted EPS






Source: eBay SEC Filings and my adjusted results

If we plot the price-to-earnings multiples for eBay over the past four years, a very different story is presented. The Blue line depicts the companies P/E ratio using reported earnings, you can see we trade slightly above the four year average, but still at very low levels given the EPS growth rate of eBay. The green line is the companies P/E using my adjustments. If the company reaches the lower end of its 2012 EPS guidance, share will trade significantly higher than their four year average. While I am not debating whether or not the company should trade at 26x earnings, I am trying to illustrate that the 17x earnings multiple reported by most sources may not be as cheap as you would expect.

Source: eBay SEC Filings and my adjusted results

Since the gross profit and operating profit margins are unaffected by these specific income statement line items, we will focus on net profit margins. Using eBay's reported net income and my adjusted net income; you see a very different story with regarding to net profit margins. Simply relying on "as reported" data can lead you to make some very inaccurate conclusions about this company.

Source: eBay SEC Filings and my adjusted results


I am very excited about the growth eBay has the potential to deliver over the next few years. The tremendous growth in PayPal could be a significant game changer for this company. What I would caution investors is to do your research before buying a company appears to trade too cheap. The difference between 17x earnings and 26x earnings can drastically affect your investment returns.

Additional Notes:

*Although not significant, I would also watch for the $15 million restructuring charge the company will take this quarter with regards to its staff reduction in the PayPal Business Unit.

*All data reported and graphed is pulled directly from eBay SEC filings (10K's and 10Q's) then ran through proprietary valuation models.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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