Thursday, January 25, 2007

eBay pleases at last

Finally, some good news from eBay!

Q4 results are out and the market likes them, judging by the share price's 13% jump after hours!

Revenue is up by 29%, there is another $2 billion authorised for share repurchases and PayPal is still growing at almost 40%.

So having read the earnings release and the conference call transcript, what are my initial reactions? eBay is just FINE at the moment. Organic growth may be down to the 20% level but the strength of eBay's business model means they can generate enough cash to repurchase large chunks of shares and invest in selective acquisitions. This should keep EPS growth about 20%.

The weak dollar has actually added 5% to the revenue growth rate in Q4 2006 so if the dollar strengthens in 2007, year on year comparisons could look poor.

One impressive thing about eBay now is the increasing diversity of its income streams. While almost 75% of revenues come from marketplaces this revenue is from countries all over the world. PayPal now accounts for almost 25% of revenue and this figure will increase as PayPal continues its meteoric growth. Skype and advertising revenue is increasingly becoming material as between them they contributed over $100 million in revenue in Q4.

Skype now has a huge lead over its competitors so hopefully its management can be a bit more aggressive in 2007 in monetising is popularity.

I think based on the strength of its business model, the fact that it has no direct online auction competitors in most countries, the potential of PayPal and Skype and the 20% organic revenue growth eBay deserves a forward PE of at least 30.

That would put it at $40. Now that would give my portfolio a lift!

Wednesday, January 17, 2007

It is all in the DNA

2007 could be the year of the large biotech I feel. Having already taken a bite of Genzyme I have been looking at Genentech (DNA) recently.

DNA is a large biotech (market cap $90 billion) which makes cancer and immunology drugs. They are majority owned by Swiss healthcare giant Roche, who take care of the European sales so nearly all of DNA's revenue comes from the US.

DNA is on a 2007 PE of about 30 and EPS growth for 2007 is forecast to be in the range 25 - 30%. So the valuation seem reasonable.

In their last earnings call CFO David Ebersman came out with some mouth-watering statements:

"For 2007, we expect R&D expense to be approximately 18% to 19% of revenues as we continue to invest in our late stage pipeline and add new molecules and indications to the early pipeline."

Translation: though DNA are struggling to recruit at the speed that revenue is growing they are trying. They later clarify that the will not sacrifice recruitment standards just to grow quicker; absolutely the right decision in my mind.

"In 2007, we expect MG&A as a percent of revenues to be approximately 18% to 19% as we continue to grow our commercial and infrastructure groups more modestly than our revenues."

Translation: they also cannot and do not need to recruit MG&A staff at the same speed as revenue growth. Result: improving margins.

My favourite: "In 2007, we expect free cash flow to increase significantly relative to 2006, as cash from operations grows and capital expenditures should stay relatively flat at approximately $1.2 billion."

Translation: Investor heaven - free cash flow on the rise.

Another nice one: "For 2007, we expect to continue to repurchase shares to offset dilution from option exercises and to maintain a flat share count and Roche’s ownership above the 55.7% level."

No dreaded share dilution then.

It takes a lot of research to get a feel for the strength of the pipeline but there is a lot going on and DNA have some of the brightest scientists around so there should be plenty of new indications in the near and distant future.

DNA is absolutely a buy in my mind. It may go down in the short term but over 3 to 5 years it is hard to see how it can do anything but grow.

Saturday, January 06, 2007

Stockmarket education from eBay

2006 wasn't a great year for me investing-wise. eBay, my second largest holding, got hammered, the US dollar declined against GBP and nothing else gained enough to counteract those two negatives. So I ended up losing over 10% in my growth portfolio.

So what was I thinking when I bought more eBay in early 2006 at $44?

Firstly I did not think eBay was only growing at 20%. Because of aquisitions it looked like it was growing at 35% which made the forward multiple of 45 look reasonable.

Secondly I was still obsessed with how far eBay had fallen from it late 2004 high of $56 and didn't think it could fall much further.

Thirdly I thought eBay had such a great business model it would be impossible to lose in the long term.

I may still be right on that third point but the fact is that great businesses can still have a declining share price for several years.

12 months ago my worst case scenario for the eBay share price now was that it would drop to $40. That was assuming a trailing PE of 45. Now, 12 months on, eBay is on a trailing PE of 30 and that is after meeting its 2006 guidance.

I guess the lesson is to stay aware of the risks of buying stocks on high multiples and not to assume that share prices will eventually return to their recent high.

So what could work for eBay in 2007? Skype's revenue could become material, which would impress all the doubters who still thing eBay paid too much for it. PayPal could continue growing at 40% and advertising revenue growth from the classified sites could accelerate.

The downside should be limited from here for eBay but I have thought that before!

Monday, January 01, 2007

Asian Citrus

Happy New Year!

I have yet to buy an AIM listed stock but that may be about to change.

A relatively new listing on AIM is Asian Citrus Holdings Limited (ACHL) which grows oranges in China for the Chinese domestic market.

ACHL are on a historic PE of about 7 with a market cap. of about £120M. They have just started paying dividends with a yield of 2%.

ACHL are a nice, simple growth story. Recently planted trees are maturing and starting to bear fruit while new trees are being planted. At the same time ACHL is seeking to increase the proportion of its sales which is direct to supermarkets which carries much higher selling prices. In the future ACHL may also start making orange juice itself which obviously sell at much higher margins.

ACHL already has a plantation of 1.2 million trees which accounts for its £27 M of revenue. However it is currently planting a second plantation which will soon contain 1.6 million trees. Production from this plantation will start next winter.

With orange production set to more than double over the next 5 years and selling prices set to increase by more direct selling there is a lot of scope for growth here.

The risks are obvious - Chinese politics, Chinese currency and citrus diseases.

Chairman Tony Tong says "We have a clear strategy and leading market position and look forward to continuing our strong growth and delivering further value for our shareholders."

ACHL looks like one to buy and hide away for five years. For the patient investor the rewards should be considerable.