Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – August 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Ebay Inc. (EBAY) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): eBay Inc.(eBay) is a global technology company. The Company has created an open source platform that provides software developers and merchants access to its applications programming interfaces (APIs), to develop software and solutions for commerce. The Company enables commerce through three segments: Marketplaces, Payments and Enterprise. The Company’s Marketplaces segment includes its ebay.com platform and its localized counterparts and its other online platforms, such as its online classifieds sites and StubHub. The Company’s Payments segment consists of its PayPal business. Its Enterprise segment includes its Magento business and provides commerce technologies, omnichannel operations and marketing solutions for merchants of all sizes that operate in general merchandise categories.
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Downloadable PDF version of this valuation:
ModernGraham Valuation of EBAY
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass 6 out of the following 7 tests. | |||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | Fail | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Pass | |
| 4. Dividend Record | Dividend Payments for 10 years prior | Fail | |
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | Pass | |
| 6. Moderate PEmg Ratio | PEmg < 20 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | Pass | |
| Score | |||
| Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor. | |||
| 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | Pass | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | Pass | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Pass | |
| 4. Dividend Record | Currently Pays Dividend | Fail | |
| 5. Earnings Growth | EPSmg greater than 5 years ago | Fail | |
Stage 2: Determination of Intrinsic Value
| EPSmg | 1.33 |
| MG Growth Estimate | -3.58% |
| MG Value | $2.20 |
| Opinion | Overvalued |
| MG Value based on 3% Growth | $19.28 |
| MG Value based on 0% Growth | $11.30 |
| Market Implied Growth Rate | 6.38% |
| Current Price | $28.26 |
| % of Intrinsic Value | 1284.07% |
Ebay Inc. is not suitable for the more conservative Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, the lack of dividends, and high PEmg and PB ratios.  The Enterprising Investor is concerned by the lack of dividends and the lack of earnings growth over the last five years.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a cautious speculative attitude.
As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $1.75 in 2011 to an estimated $1.33 for 2015.  This level of demonstrated earnings growth does not support the market’s implied estimate of 6.38% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Ebay Inc. (EBAY)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | $2.20 |
| PEmg | 21.26 |
| Current Ratio | 1.67 |
| PB Ratio | 1.75 |
| Dividend Yield | 0.00% |
| Number of Consecutive Years of Dividend Growth | 0 |
Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Total Current Assets | $28,549,000,000 |
| Total Current Liabilities | $17,060,000,000 |
| Long-Term Debt | $6,757,000,000 |
| Total Assets | $45,658,000,000 |
| Intangible Assets | $8,185,000,000 |
| Total Liabilities | $25,853,000,000 |
| Outstanding Shares | 1,225,000,000 |
Earnings Per Share History
| Next Fiscal Year Estimate | $1.36 |
| Dec14 | $0.04 |
| Dec13 | $2.18 |
| Dec12 | $1.99 |
| Dec11 | $2.46 |
| Dec10 | $1.36 |
| Dec09 | $1.83 |
| Dec08 | $1.36 |
| Dec07 | $0.25 |
| Dec06 | $0.79 |
| Dec05 | $0.78 |
| Dec04 | $0.57 |
| Dec03 | $0.34 |
| Dec02 | $0.21 |
| Dec01 | $0.08 |
| Dec00 | $0.04 |
| Dec99 | $0.01 |
Earnings Per Share – ModernGraham History
| Next Fiscal Year Estimate | $1.33 |
| Dec14 | $1.41 |
| Dec13 | $2.05 |
| Dec12 | $1.93 |
| Dec11 | $1.75 |
| Dec10 | $1.30 |
| Dec09 | $1.18 |
| Dec08 | $0.82 |
| Dec07 | $0.55 |
| Dec06 | $0.64 |
| Dec05 | $0.51 |
| Dec04 | $0.34 |
| Dec03 | $0.19 |
| Dec02 | $0.10 |
| Dec01 | $0.04 |
| Dec00 | $0.02 |
Recommended Reading:
Other ModernGraham posts about the company
Other ModernGraham posts about related companies
Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  This is not investment advice and all readers should speak with a registered investment adviser prior to making any investment decision.  ModernGraham is not affiliated with the company in any manner.
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