UBS analysts Eric J. Sheridan, Timothy E. Chiodo, Vishal J. Patel take a close look at eBay, examining a potential PayPal separation and deeming it unlikely, eventually setting the online auction company’s price target as unchanged.

ebay Inc (EBAY) paypal Carl Icahn
ebay Inc (EBAY) paypal

PayPal separation unlikely in our view; 20% IPO a potential solution

We agree with eBay management that PayPal should remain with eBay’s other businesses (Marketplaces & eBay Enterprise), and thus view a full structural separation as unlikely. However, we believe that one possible resolution to Carl Icahn’s proposal could come in the form of a 20% IPO spin-off of PayPal, accompanied by a larger buyback. We see limited downside from the low $50s as near-term results should be supportive of the reset ’14 & ’15 guidance and eBay trades more as a special situation.

20% PayPal IPO + Leverage + Portion of Existing Cash = Significant Upside

We believe eBay could repurchase up to 19% of its market cap (~$13b of the ~$70b), helping to take our 2016 EPS estimate from $4.14 (current) to $4.53 (theoretical), which would imply a 23% ’14-’16 EPS CAGR – eBay shares currently trade at 11.5x this hypothetical 2016 estimate, a PEG of 0.51x. We get to the ~$13b potential buyback figure by combining the proceeds from a hypothetical PayPal IPO (adds $7.6b for a buyback, or 20% of our $38.2b PayPal valuation estimate), increasing gross leverage to 0.5x from 1.0x (adds $3.5b), and half of the company’s US cash balance (adds $1.6b). We currently model $1.4b in buybacks over 2014 & 2015 (the level required to offset dilution from SBC) – the incremental $11.4b would allow eBay to repurchase an additional ~218mm shares (above and beyond the dilution offset).

eBay SOTP Analysis Yields $70 Potential Share Price (>30% Upside)

As part of our analysis, we provide 2015 segment revenue & EBITDA estimates for PayPal, Marketplaces, and eBay Enterprise. After putting an EV/EBITDA multiple of ~16x on PayPal, 10x on eBay Marketplaces, and 8x on eBay Enterprise, we arrive at a fair value of roughly $70 for eBay’s stock. That said, we do not expect EBAY to trade at the full value of the SOTP (i.e., conglomerate discount).

Valuation: Maintain Buy Rating, $64 PT

Our $64 PT (unchanged) is based on our weighted average framework (EV/Sales, EV/EBITDA, EV/FCF) based on our 2013-15 estimates. No changes to our estimates.