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.
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.