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.