MorningWord 1/22/15: That’s What He Said $EBAY $UAL

by Dan January 22, 2015 9:23 am • Commentary

The first reaction to Ebay EBAY’s Q4 report and disappointing forward guidance last night was a quick 5% decline. That was until headlines hit that activist investor Carl Icahn (who set his sites last year on Ebay) and the company had reached a “standstill” agreement. The agreement means Icahn gets board representation and the company is going to move its feet to cut costs and move towards the previously announced split of their faster growing PayPal business.  The stock is now trading up about 3% at $55, but I suspect this won’t last as there was little in the results and guidance to cheer about, and investors seem uninterested in the proposed Tax-Free Spin-off.  Yesterday in a Name That Trade Post (A Paypal Dispute) I outlined a scenario that I think should excite investors in their desire for their shares to breakout of its two year funk:

Here is one scenario that I think investors are not considering, the potential for a buyer for PayPal emerging as Apple’s PAY catches steam. There are no shortage of companies like Google, Microsoft, Yahoo, Facebook etc etc who could be in the market for a product to compete witu Apple Pay… not to mention a financial buyer like private equity.

I’ll go out on a limb and make a silly prediction. The spin out never happens and PayPal gets bought in 2015.

It is my view that PayPal may be weaker as a standalone, which was management’s original response to Icahn’s call for a split in 2014, and despite PayPal’s first mover advantage in payments, the mobile payments ground is quickly moving below their feet.  Google needs to make a full on frontal assault with their Wallet to combat what will be rapidly growing acceptance and usage of their arch rival Apple’s PAY.  And what about Microsoft, Facebook (in June hired PayPal’s former President), Yahoo and maybe even Amazon.  Some have nascent electronic payment systems, while others have none at all.

If PayPal were to continue at its current course of innovation, given its long history in electronic payments I suspect AAPL PAY and some sort of combination with GOOGL’s Wallet could quickly relegate PayPal to a bit player in the years to come as a standalone.

If the stock were to fall back towards $50, which has been a massive support level for two years, this could be a great entry for those looking for other outcomes than merely a tax free split of the faster growing payments biz:

EBAY 2yr Chart from Bloomberg
EBAY 2yr Chart from Bloomberg


Oh, and one other name we looked at yesterday, United Airlines (UAL).  The company reported Q4 results this am and missed estimates on losses from fuel hedges and the closure of a third party fuel sale agreement.  The stock is trading up 3% in the pre-market making new all time highs.  In my Name That Trade post (Plane Geometry) I reinforced my belief that this airline is particular does not look attractive to commit new capital to for the following reasons:

-lower for longer oil means the end of very profitable fuel surcharges?

-companies like UAL and AAL still have very high leverage ratios with UAL total debt / total capital ratio of .38, AAL  total debt / total capital ratio of .36 and DAL at .22, UAL and AAL have some wood to chop before they are out of the woods and can consider meaningful cash return.

-Those that have benefited in the recent past from hedges may not be so fortunate on the next move, gains could be short term and reflected in stock’s current prices.

-if the companies lose their discipline and dramatically increase capacity we could see some of the lower fuel cost benefits erode

-synergies from consolidation likely to be squeezed out at this point

-carriers like UAL that rely a great deal on international routes could see negative effects of strong dollar and lower demand from a weak global economy.

But concluded as we usually do prior to potentially volatile events in the near term when we have a longer term view:

But it’s tough to stick your neck out on a stock like this right before the event.

This stock, with today’s gap to new all time highs is on our hitlist. Stay tuned.