Ebay… a long term BUY

Ebay recently announced its earnings and it continued its slide down to about 15$, despite some very impressive results, a profit of 492.2$M (compared to a loss of 935.6$M in the same period last year). The main reason why Ebay got killed is its own announcement that growth had slowed down, causing a layoff of 10% of its workforce.

Ebay has 3 main businesses:

-Auction and flagship: Ebay.com (and its local websites): this business is rather mature and growth has been of 4%. I think that in many local markets, Ebay has faced increased competition that is often better suited to its residents. But still, Ebay remains the leader in this market and I would think that given the current state of the economy, this represents an opportunity for their users who will be looking for second hand objects and cars increasingly. As well, Ebay has been diversifying business adding divisions like Stubhub, that are specialised sites and can compete in niche markets.

But an important opportunity for Ebay remains two of its important assets, Paypal and Skype:

-Paypal, the leader in online payments processing continues to go without any major competition and while it is true that at any moment, a major competitor such as Google could enter this market, for now Paypal’s 27% increase seems on pace to continue.
-Skype on its part, despite very strong competition continues to generate revenues, revenues were up 46%. Again, i feel like Skype still has long wways to go and I think the way they are dealing with Skype is very impressive. They have been patient instead of doing some suggested measures that could have been good in the short term (such as taking out most free features on Skype) but would have taken away a lot of future opportunities.

EBay CEO, Mr. Donahoe said he was pleased overall with the company’s performance in a tough economic environment. “These are turbulent times for which no one has the perfect playbook. There is a high degree of economic uncertainty and turmoil in the business market and that is impacting consumer spending,” he said.

So with Ebay currently trading at a P/E close to 11, I can only say that I would consider it a strong buy. I think Ebay still has a lot of growth for future years through its core business as well as through Skype and Paypal.

Over the past few weeks, the markets have moved up and down, though mostly down but in the mix of things, a lot of irrational movements have been occuring and it is often very difficult to find any logic in what has been going on. When such irrational behaviour occurs, some stocks become mispriced and to me, it seems like Dow Chemicals (DOW) is certainly one of them.

Dow Chemicals is the 2nd largest chemical company in the world (behind Dupont) and is truly a global company with plants, resources and clients from all over the world. As recently as a few months ago, the company started doing a strategic re-alignment basically moving out of some less profitable operations in order to put more energy into the highest value activities.

On Thursday, the company based in Michigan announced its results, a 6% increase in profits. “In our view, we will likely see a global recession through most of 2009. Although Dow is well positioned to ride out a global economic slowdown because it has cut costs and preserved cash, its more highly leveraged competitors “are not going to make it,” Liveris said during a teleconference with industry analysts.”

The company is said to be undervalued by many analysts and I tend to agree with that view. I think Dow will profit in the medium to long term from these tough times as the overcrowded industry has a few less players. As well, I think it is very important to look at the very high dividend yield offered on this stock.  DOW currently offers a .42$ quarterly dividend, which using Friday’s closes comes to a dividend yield a little over 7%.

DOW has a strong financial situation and solid cash flows and has been making EPS of between .42$ and .99$ in the past year ( a total yearly EPS of 2.49$). CEO Andrew Liveris has also said on CNBC as recently as last Thursday that as long as he was CEO, the dividend was there to stay.

As for other financial analysts, they have a overrate rating on Marketwatch with a target of 36.50$ (that’s about 50% of capital gains as well as the dividend gain!

Apple, the darling company in the tech industry announced very strong earnings today after the close of the markets, coming up with numbers much better than expected from analysts. The profit rose 26% mostly because of an outperformance in the sales of the much hyped “Iphone”.

The profit per share came in at 1.26$ per share. Assuming flat growth in profits, that comes out to a P/E ratio of over 20 (using the after-hours price of 103.61$).  In 2007, Apple had saw an important rise in net income in the fourth quarter as it profits from the back to school buying, thankgiving and christmas buying, and I think it’s fair to assume that it will still profit.

The major question of course is how much the recent economy struggles as well as the depressed consumer confidence will affect their buying of what are often seen as luxury items such as ipods and iphones. Our best estimate and from the numbers we’ve been seeing is that it will not affect their numbers as much as the market has anticipated in recent months with the stock being slammed from its 52 week high at over 200$. We still expect a 1.76$EPS for Q4, a little over the street estimate and well over the very conservative estimate from AAPL which came out in a 1.06-1.35$ range.

Apple has a lot of growth opportunities as its handsets and devices become more global. The Iphone for example is now available in over 50 countries and we believe that the device will continue to perform very well. It has already exceeded Apple’s goal of 10 million handsets sold by 3 months and now provides a steady cash flow for Apple to use in other products as they have proved to do in the past. We also belive that Apple will reduce its prices as it becomes even more agressive for market share in the smart phone market, especially in the US.

Apple has already sold more devices in the past quarter than major rival RIM’s blackberry, an impressive feat after only one year in the cell phone market. It is already #3 in the world revenues for phone makers. “Who knows what the future will be given the worldwide economic slowdown,” Jobs said. “But we ranked as the third largest mobile phone supplier in revenues. Not bad for being in the market for only 15 months.”

Earlier this week we profiled GOOG and still believe that between the two, Google is the best buy, but would still advise to go long AAPL with a 120-130$ target within one year.

Google has been living through many ups and downs in recent months, as has the rest of the stock market obviously. And while I have seen many reports about how in these times, investing by looking at P/E earnings might be a mistake, but without a better reference, that is still what I’m looking for. And since Google released its latest quarterly earnings report last week, it is a good time to look at the possibilities for Google.

-Earnings per share (EPS) came in at 4.92$/share excluding special items. If you put this as a yearly figure (which I would think is conservative since the Thanksgiving/Christmas season would be the highest earning quarter in terms of advertising), you get about 20$ of EPS. I think a P/E between 25 and 30 is justified for Google given its high growth (more on that later) which comes up to a 500-600$ target for Google….

-I think Google can maintain the growth for a while still because of 2 main reasons: extensive advertising in its current products and new products

-Firstly, I think Google has been able to open up a few new channels of advertisements such as the new possibility of ads on google maps (which has great potential in my opinion), unblocking of gambling ads in their search engine for certain products such as Britain (where it is legal)

-They also have quite a few products that have been pretty much ad-free while they are gaining market share such as Google Finance but could gain significant earning power when Google decides the time is right. Google also has the potential to gain in the medium future from new activities such as Android, Google’s mobile phone play.

-Because of its dominance in the search market (62.9% in the US and still growing), Google has more room to increase ads without having a user backlash than many competitors.

-And finally, I see as a major positive the fact that Google has become a lot more diverisified with this quarter being the first one ever with more than half of advertising revenues coming from outside of the US.

I’ve received a few questions wondering about what kind of investments have been performing well in this very tough environment because let’s face it, a lot of investors think we are far from out of this situation and that an important recession will occur and probably has already started. While personally, I’m far from convinced of that situation, I have been looking through the universe of possible investments to see what kind of investments were performing well this year. No doubt, they are rare and tough to find.

Obviously, in a tough environment like the current one, it is difficult to escape going into bonds. With gold, government bonds are the safest investments and generally go up in such situations. Normally, that is true of all government bonds (almost)… but given the many credit concerns, many government bonds have been suffering, even in high quality countries like Germany. So it is safer to stay in US Government bonds, that are still seen as the safest investment in the world.

As you will see in the coming months, I am a big fan of ETF’s as forms of investments for many reasons (liquidity, cost, etc). And that is even more true for bonds. In such markets, million dollar investments are more common and so if you are planning on investing a few thousands out of your RRSP or your 401K, you will be paying a lot to get into those bonds. Not necessarily in terms of commissions but just in terms of the price that you will be able to get.

Because of that, I recommend that you invest in TLT, an ETF managed by Ishares, that tracks US bonds of 20+ years to maturity. It does pay coupons as would a bond and will give you an easy way to get in a position to profit from such uncertainty. To give an example, TLT has a 5.17% return so far this year. Not too bad when you compare it with the -35.55% return on the S&P 500.

So when you read that you should be diversified and hold a certain portion of fixed income in your portfolio, keep in mind that sometimes, equity positions should really be considered fixed income, such as this one (same as holding a GLD ETF would be more of a commodity position than equity).

With everything that has been going on in the past few months, once of most discussed subjects is the use of mark-to-market accounting for illiquid assets. Many of these illiquid assets are mortage backed securities (MBS) as well as other asset backed securities (ABS). While some of these are truly risky because of potential bankruptcies, others are considered very safe because they are senior. By senior, I mean that an important portion of the mortgages in an MBS would have to default in order to have any kind of impact on the investors of these senior notes.

The problem however is that like many other investments, these notes are something that many financial firms are trying to get rid of because of the stigma associated with it, often without much regards to the price. Many of the big financials wanted to sell these assets to avoid any possible write-downs. These write-downs would not happen because of a deterioration of the loans but rather because of declining prices.

I have seen a lot of research suggesting that these prices are now underpriced and many of the biggest investors have been buying such assets (biggest one is probably Blackrock). The problem is that for small investors, getting involved in such a market is nearly impossible. But there exists a few indirect plays and one of them I have been looking for is VVR, Van Kampen Senior Income Trust, which is down 53.02% in the past year. Here is the official description of what they do: “The Trust invests primarily in a portfolio of interests in floating or variable-rate senior loans to corporations, partnerships and other entities, which operate in a variety of industries and geographical regions. It invests in various industries, including aerospace/defense, automotive, broadcasting (cable), printing and publishing, entertainment and leisure, healthcare, buildings and real estate, electronics, personal and miscellaneous services, finance, paper and forest products, and beverage, food and tobacco”

So I would consider that for now, this could be a good short to medium term investment as these illiquid assets are bought back by the US Treasury and as many other investors (often vulture funds) get involved in this market. The fund manager estimates the NAV to be 4.49$. The security also currently offers a 12.43% dividend yield.. not bad hey?