Friday, February 09, 2007

Calls of Note Part 3

- Merrill Lynch is positive on eBay (NASDAQ:EBAY) saying their thesis on the stock is that while eBay's 4Q GMV growth at 16% (ex-F/X) is underperforming eCommerce growth at 25%+, the company has the consumer knowledge, brand presence and balance sheet to stabilize or even accelerate GMV growth in 2007. Firm believes an improvement in GMV growth trends, along with margin growth, could drive EPS upside and multiple expansion for the stock. They expect 2007 EPS growth to accelerate to 24%, up from 21% in 2006.

Recent initiatives to reaccelerate GMV growth include 1) category specific pricing (improving listing quality or selection); 2) acquisitions in attractive growth categories (e.g. StubHub); and 3) category specific business improvements such as Motors 2.0 and a subscription listings program for auto dealers.

Firm's new GMV category tiering analysis shows that 1) eBay is facing much easier comps for all categories in 2007 and 2) the GMV mix is favorable, with faster growth in higher value categories, which should augment total GMV growth. Each 1% of incremental GMV growth in 2007 would drive an estimated $0.01 in incremental EPS.

eBay trades at 22x 2008E adj. EPS estimate of $1.50 (excl. stock comp), which at 1.1x growth is an attractive entry point. ML's $44 price objective represents a 29x PE and 1.45x PEG ratio.

Notablecalls: Not actionable but good to know category.

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