Last week we saw conclusive evidence, if it were needed, that America is heading for recession as data for May showed unemployment spiking from 5% to 5.5%. So who will be the winners in this tougher environment?
Big discounters such as Wal-Mart (tipped here in September at $42.90 and now trading above $58) will do well. But the shares are not cheap on 17 times 2008 earnings.
eBay (NASDAQ:EBAY), rated a BUY by Piper Jaffray
I advise prudent investors to take some profits and perhaps put them in eBay, the world’s top online auction site.
For those unfamiliar with the company’s business model, eBay offers a way for anyone to buy and sell online. Items are sold via auction, or at a fixed price, with eBay charging sellers a fixed fee and a percentage of the final price.
So why is a recession good for eBay? When people are forced to cut back, not only do they buy more second-hand goods, but they also try to sell unwanted items for extra cash. These trends should lift eBay’s turnover. It already serves 84 million active users, who generate 2.3 billion listings a year. Also, as people lose their jobs there will be a surge in bankruptcies. This will mean more goods (such as fridges and TVs) being recovered by administrators, and advertised on eBay’s online shelves.
Thirdly, one of its main rivals in America, the pawnbrokers’ association, could be in trouble. Last week, Ohio governor Ted Strickland signed a bill into state law to protect consumers from loan-sharks, effectively shutting the sector down. If Barack Obama wins the presidential election in November there is a good chance this legislation will extend across the country, hitting pawnbrokers and boosting eBay.
Lastly, the firm is good value. Wall Street expects 2008 sales and underlying earnings per share (EPS) of $9.0bn and $1.74 respectively, rising to $10.2bn and $1.96 in 2009 – putting the shares on 16.1 and 14.9 multiples. This is too cheap for a dominant player in a high-growth industry, especially as first quarter organic revenue growth was 16%. The balance sheet is also rock-solid with more than $4bn of net cash, and it is geographically well spread, with 55% of sales made outside the United States.
On the downside, eBay faces competition from other web giants, such as Amazon, Yahoo and Google. The latter has launched its own cash transfer service, called ‘Checkout’, in direct competition to eBay’s PayPal. And in an effort to reinvigorate its core US business, eBay is introducing radical changes to its fee structure, search functionality and loyalty programme. But while this strategy could backfire, early signs are promising, with second-quarter listings up on the first quarter. With the shares trading on a 2009 PEG ratio of 1.2, eBay looks just the ticket.
Recommendation: LONG-TERM BUY at $27.98
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments