(02/05/14) Icahn Eyes eBay

One of our favorite stocks has caught the attention of activist investor Carl Icahn, explains Geoffrey Seiler, editor of BullMarket.com.

eBay (EBAY) disclosed that Carl Icahn had accumulated a 0.82% stake in eBay and proposed a non-binding shareholder proposal to split-off PayPal as a separate unit.

The board rejected the split-off proposal, saying it has examined that idea in detail in the past, and believes keeping PayPal together with eBay's Marketplace unit is in the best interests of shareholders.

It believes PayPal is better able to leverage the company's technology capabilities, commerce platforms, and relationships with retailers, brands, and large merchants worldwide, as part of eBay.

As to its results, the company earned $850 million, or 65 cents per share, up 13% from $751 million, or 57 cents per share, a year earlier. Adjusted earnings rose 15% to $1.07 billion, or 81 cents a share.

The result was in line with the analyst consensus. Revenue jumped 13% to $4.53 billion, just below the $4.54 billion consensus.

eBay generated $1.43 billion in free cash flow during the quarter. It ended the quarter with cash, equivalents, and investments of $12.8 billion, and $4.12 billion in debt. Net cash was approximately $6.62 per share. During the quarter, the company repurchased $254 million of its stock. The company's board also authorized another $5 billion for share repurchases.

Looking first at the operating results, eBay delivered an OK quarter, given challenges, such as the shortened holiday season for the Marketplace unit. PayPal once again delivered solid growth.

In both cases, we think the growth in active users, up 14% year over year at Marketplace and 16% for PayPal, points to continued momentum for the businesses.

Icahn is not the first investor to suggest PayPal should be spun-off. One of the arguments is that PayPal would likely command a higher multiple on its own; it would also open PayPal up to be a takeover target.

Our view of Icahn's investment is that it is, mostly, a positive for shareholders, but a distraction for management. Icahn doesn't always get everything he wants, but he's been pretty successful at bidding up the price of companies he has a stake in.

His investment in eBay, at the least, should help raise the floor price a bit and it certainly will lead to a vigorous debate over the merit of his proposal. Meanwhile, eBay remains one of our favorite stocks for the long-term and we continue to rate it a Buy. Our target is $64.