idea #25 ebay? yes, ebay.

Something about the idea of owning eBay stock is unattractive.  Online auctions are silly.  Will the fad will wear off?  Will another competitor kill them?    Ebay surprised analysts a little bit with their 4th quarter and analysts have moved their earning's estimates up.   What is the right price to pay for a debtfree, "tollbooth" style internet business that offers a great value proposition to clients in any economic climate?   Merrill calls it "defensive e-commerce," yet they rate it a "hold" with a $28 price target.   The company is bringing in over $2 per share in cash, and it's sitting on nearly $4 per share in cash, with no debt.  So the big questions are: (1) Is their service here to stay? (2) will they pursue another money losing investment like SKYPE?    Ebay will start showing up on Magic Formula style screens with their almost 20% ROA and 13x p/e ratio (the sale of skype hit their earnings this year).  Plus, Magic Formula doesn't care about margins or financial leverage, 2 areas that eBay would compare favorably with others.  Here's a  big name,  high margin, unleveraged, stable cash cow trading at under 20x sustainable earnings.  Those qualities are unusual.  Someone on VIC wrote up eBay when it was at it's bottom of $12ish back in December, 2008.  They argue it has a nice moat.  You don't find stocks with "moats" and have fat profit margins that trade at 10x earnings and have no debt (as it did, it has since doubled). Will Google start online auctions?  Can eBay's empire be dismantled?  What is their 25% share of Craigslist worth?  At the rate eBay is bringing in the cash, they can buyback the company every 9 years... I'd buy a quality business with a 9 year payback if I could be sure that management will reinvest wisely.  I think they're being fairly punished for their Skype sale.  Tech investors don't care about valuation, they're too worried about topline growth.  Value investors aren't used to seeing value in headline stealing technology names that used to be high flyers.

idea #24 Sunoco

In 1998, there were 168 million shares of Sunoco stock outstanding.  Each share cost you $40 and it would earn you $1.50.  Back then, they had 5 main refineries and company-wide capabilities to process 760,000 barrels of oil per day.  Not much has changed.

Nowadays, there are only 116 million shares outstanding.  The stock costs you a lot less ($26) and will still earn you… the same $1.50 (estimates for 2010).  They still have the 5 main refineries and are capable of processing 910,000 barrels of oil per day.   Their capital structure has shifted to partially explain the share quantity change... now they have $2.4 billion in long term debt, a decade ago they had $940 million...but their debt cost them only 5% after tax now vs. 7% a decade ago. 

Meanwhile, the number of cars on the road has steadily increased by an average of 1.4% since 1960.  Three years ago Bush said the reason oil prices were skyrocketing was because of refinery shortages.  The market has certainly responded... apparently the market over-responded.  Now, they are shuttering refineries.   At the time of Bush's words, Sunoco stock traded at $70+ per share and was booking $7+ per share in earnings (10x p/e ratio! how cheap is that?!?).  The cashflow from operations is as volatile as the share price, in excess of $2 billion during peak years, and back down to the $500 million range recently.  Still, at $500 million it's substantially higher than the periods I reviewed a decade ago ($300 - $400). 

The entire refining industry is on hold:

From Tina Vital at S&P:
"U.S. demand for refined products fell by more than 3
million b/d from the peak in February 2008 to the
trough in June 2009 on a global economic
slowdown, and according to the International
Energy Agency (IEA), a minimum of 2 million b/d per
year of new refining capacity worldwide is slated to
come on stream between 2009 and 2014. With
pending changes in the U.S. vehicle fleet and
greenhouse gas (GHG) legislation, we believe U.S.
gasoline demand has peaked and will decline
through 2030, while U.S. distillate (including diesel)
demand will increase."

Sum it all up...

In 1998, Sunoco stock traded at 26x earnings and yielded 1.25%.  I'm pretty sure I was getting at least 4% in my money market account at Schwab.  At the time, I could've also bought a 10 year treasury that yielded 5.5%.  

In 2007, The world loved refineries.  Sunoco stock traded at 10x earnings and yielded 1.5%.   I think I was probably getting 3% on my money market account.  A ten year treasury yielded 4.5%  

Now, a single share of Sunoco stock is cheaper than ever ($26) and buys the largest claim *ever* on the same bunch of refinery assets, it yields 2.3%, ten year U.S. treasuries are 3.5%, cash yields zilch.  Sunoco doesn't look so bad.  Not great, but not so bad.   It may not be the bottom but it ain't the top.