The Long and Short
Strong growth at eBay continues as pandemic ebbs
Meredith Contente | May 14, 2021
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Online shopping is not a new phenomenon, but the pandemic fueled adoption of digital buying across all generations accelerated the transition away from brick-and-mortar. While traditional brick-and-mortar is not dead, the wind down of the pandemic will not drive people away from the convenience of online marketplaces. Coming off a stellar quarter, EBAY is expected to continue to post solid organic growth as they remain committed to their high BBB ratings and very conservative balance sheet. The company’s debt spreads in the back end of the curve offer a meaningful yield pick-up relative to BBB retail peers Dollar General Corp. (DG – Baa2/BBB) and Lowe’s Cos Inc. (LOW – Baa1/BBB+). There is further room for upside as EBAY’s EBITDA margins are roughly double those at both DG and LOW, with net leverage of 1.1x a full turn better than DG and ahead of LOW by four ticks.
EBAY’s most recent results highlight the continued growth with revenues up 38% and gross merchandise volume (GMV) up 24% year-over-year (ex fx). Although EBAY’s growth is expected to slow, with management guiding for second quarter organic growth in the 8%-10% range, that this is coming off of very strong comps as organic growth was up 21% in the second quarter of 2020 (ex fx).
Exhibit 1. Retail 7-year to 30-year curve (A to BBB)
Source: Bloomberg TRACE; Amherst Pierpont Securities
Cash Remains King
EBAY’s balance sheet benefits from its sizeable cash and equivalents position which stood at $3.9 billion at the end of 1Q21. Additionally, EBAY maintains an untapped $2 billion revolver which lends to the company’s overall liquidity position. EBAY has historically kept a large cash position on its balance sheet with the average cash position over the last 5 years totaling $6.5 billion. Management has noted that a strong cash position helps to preserve its financial flexibility which enables the company to execute on its strategies and help drive long term value creation. Looking out, EBAY looks to target a cash balance of $3.5 billion. We note that even its long term cash target of $3.5 billion compares favorably to its retail peers. While DG ended fiscal 2020 with $1.4 billion of cash on hand, its average cash balance over the last 5 years has been closer to $460mm. Additionally, EBAY generates very strong free cash flow which totaled $2.4 billion on a LTM basis, translating to a 21% free cash flow/sales ratio. DG, which has witnessed solid free cash flow growth over the past 12 months due to the pandemic, still has a free cash flow/sales ratio that is roughly 9%, over 10 percentage points below that of EBAY.
Committed to High BBB Ratings
Management highlighted that its capital allocation strategy remains unchanged, which is based upon its commitment to maintaining its current high BBB ratings profile. That said, EBAY continues to target net leverage of 1.5x, while gross leverage is expected to remain below 3.0x. Currently EBAY stands at 1.1x and 2.1x, respectively, on both those leverage targets. We expect management to remain balanced with respect to debt reduction and shareholder rewards. While EBAY currently has $5.7 billion of share repurchase authorization remaining, management demonstrated its balanced approach to the balance sheet in 1Q21 having repaid $940 million of debt while spending $122 million on dividends and $292 million on share repurchases. EBAY’s most recent $2.5 billion debt issuance will be used to repay the $1.75 billion of debt maturing in 2022. The remaining $750 million of debt will increase leverage slightly to the 2.3x area; however, EBITDA is expected to continue to grow this year and leverage should decline back down to the 2.0x area.
Exhibit 2. EBAY Cash & Debt Targets
Sale of Classifieds Business to Further Strengthen Balance Sheet
EBAY announced the sale of its classifieds business to Adevinta on 7/20/20 for $9.2 billion. According to the deal terms, EBAY is expected to receive $2.5 billion in cash ($2.0 billion net of taxes), as well as Adevinta shares representing a 33% voting stake. While the deal was expected to close by 3/31/21, it was flagged for some competition concerns in the UK. As such, EBAY and Adevinta proposed legally binding solutions to resolve regulatory concerns by the February 2021 regulator deadline. EBAY now expects the deal to close in 2Q21. On EBAY’s last earnings call, management noted that as of the end of April, Adevinta’s share price had appreciated nearly 37% from the transaction announcement, increasing the value of the deal to over $12.7 billion. The delay in deal closing should have no negative impact on EBAY’s ratings or spreads.