BNI vs. Ebay

[Guest HarryLong]

Here is a quick comparison I did of BNI vs. eBay as a buyout target:

 

http://seekingalpha.com/article/210944-ebay-an-extremely-attractive-buyout-target

 

At $22.16 a share on Friday, eBay (EBAY) is an extremely attractive buyout target. It has that rare combination of stable free cash flows, low capital expenditures, and a cheap valuation relative to its quality.

 

There is absolutely no question that the eBay's auction/marketplace business is organically growing more slowly and that growth by acquisition of regional powerhouses such as Korea's Gmarket could be the key driver of growth for that business line in the future.

 

However, businesses such as Paypal have dramatic organic upside potential and are still growing at a very fast pace. In the latest quarter, revenue from Paypal increased 26%, year over year.

 

At an EV/EBITDA of less than 9, that is a fair to cheap valuation for the auction business, and that valuation essentially gives one a very cheap call option on Paypal, which I believe could become an even more serious competitor to Visa, Mastercard, and traditional bank-centric transactions

 

In addition, the quality and stability of eBay's historical free cash flows stacks up very favorably against those of recent large acquisitions.

 

Table 1 is a summary of 10 years of Free Cash Flows at a large company that was recently acquired (click to enlarge images):

 

Table 2 is a summary of 10 years of Free Cash Flows at eBay:

 

Can you guess which company is our “Mystery Company”? It's Burlington Northern Sante Fe (BNI), recently acquired by Berkshire Hathaway (BRK.A). I believe that if one compares the growth records of each company, along with rudimentary estimates about which company will require more capital investment in order to grow in the future, that eBay compares quite favorably.

 

Then, it really comes down to one's estimate of how certain future cash flows are from each. I will leave that calculation to the gentle reader, but suffice to say, eBay would be a very shrewd acquisition for a buyer that covets large and growing free cash flows.

 

Disclosure: Author holds a long position in EBAY

[beerbaron]

I believe E-Bay has one of the very rare real moat on the internet.

 

BeerBaron

[DCG]

I'm much more interested in Paypal than eBay and wish they'd spin it off.

 

My main issue with eBay is I don't have a ton of faith in John Donahoe. I just haven't been very impressed with this guy in all the interviews I've seen of him.

 

As far as the main eBay business, they've mainly grown sales in recent years by increasing their rates. It's becoming pretty damn expensive to sell on eBay. I think there will be a point where a lot of sellers start leaving the site if they continue to jack up their rates.

[oldye]

  They're not mutually exclusive but if your going tech why not go with Dell which is much cheaper company and spits out more cash.

[beerbaron]

One of the main question about eBay is what are they going to do with their Free Cash Flow? Did they talk about it the latest conferences calls?

 

I'm usually very vary of companies with nice FCF but no dividends. The fact that the management see themselves as a growth creator makes it scary for shareholders that are seeking value. I hate seeing companies waste good money on bad investments. If there is no clear synergies then that means that there will no value creation by merging the entities.

 

E-Bay/Paypal  businnesses are great. As a buyer I would never go into the hassle of going into another auction site. I even have a few hundred buck sitting in my Paypal account... think of all the people with a few buck that they are probably never going to use. That is a nice float at absolutely no cost or risk. Talk about a nice moat...

 

BeerBaron

[Guest HarryLong]

eBay is a great value. If it is acquired, and my argument is that it should be, an acquirer can take the free cash flow and do whatever they want.

[Parsad]

They're not mutually exclusive but if your going tech why not go with Dell which is much cheaper company and spits out more cash.

 

I think Dell's business is going the way of Sears over time.  Every facet has deteroriated over the last decade...margins, debt/equity, inventory turnover, cash flows...you name it.  Microsoft's business has been impinged upon by the likes of Google, Apple, etc., yet the deterioration there is nothing like Dell's...infact in many facets, Microsoft has become far more efficient.  I'm actually surprised Fairfax has so much in Dell.  Cheers!

[elltel]

AMZN doesnt get mentioned nearly enough...

With most of the sales going through on eBay at fixed prices... I prefer Amazon model using market place....

 

work out which site you have spent more/ordered more things on in the last year. I bet Amazon wins.

[mpauls]

ditto on dell.

[Guest dealraker]

I have never understood all the interest in Dell.  When I read the financials I don't see what Mason Hawkins talks about at all.  Prices going down constantly and competition going up--- seems to me a very stressful place to put your money.