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BMO Capital Markets Bids $64 For eBay (EBAY) – Will It Get There?

 February 28, 2013 04:19 PM

(By Rich Bieglmeier) Earlier today, BMO Capital Markets initiated coverage on eBay with an "outperform" rating and a $64.00 price target – 16.5% upside as we type.

For the one or two out there who don't know, eBay Inc. provides online platforms, tools, and services to help individuals and merchants in online and mobile commerce and payments in the United States and internationally.

For the NASDAQ 100 member to hit BMO's price-target, the online auction/buy it now service will need to trade at 23.53 times Wall Street's 2013 consensus earnings per share (EPS) estimate. The projected, needed price-to-earnings ratio is a premium of 66.86% when compared to the bottom line's projected growth rate of 15.30%.

Getting to a P/E of 23.53 shouldn't be a problem for eBay as it currently trades at 27.72 times trailing 12 month (TTM) EPS with a five-year average TTM P/E of 24.53. However, high P/Es for eBay are back-loaded with all price-to-earnings ratios of more than 30 in pre-subprime crisis months. Shares are currently trading in their highest P/E zone since the crash.

[Related -eBay Inc (EBAY) Q4 Earnings Preview: About to Be Bid Lower?]

While eBay's average P/E for the past five-years is 24.53, the average EPS growth rate during the same time frame is 8.38%. This means the AMEX Internet component tends to trade at a substantial premium to its earnings growth – by 341%! Wow.

With earnings slated for a 15.3% increase, could eBay see its TTM P/E move to pre-crisis levels in the 40s and 50s? iStock doubts it, but if so, eBay's price would smoke BMO's $64 target.

Our second measuring metric is price-to-sales (P/S). As it stands now, eBay trades with a P/S ratio of 4.99, and at 4.37 times the consensus 2013 revenue estimate of $16.35 billion. The average P/S during the last 5 years is 3.829 with a high of 5.547, not too far from where the stock is trading today. There is some room for $64 as it translates into a P/S ratio of 5.08 based on BMO's outperform target.

[Related -ETF Periscope: Sentiment On Main Street At Odds With Jubilation On Wall Street]

Overall, eBay (NASDAQ: EBAY) is likely to hit BMO's price target, with some wiggle room to the upside for valuation expansion; however, any ventures into the upper $60 could be a good time for short-term investors to consider profit-taking as eBay shares could be maxed out on a TTM and P/S basis.

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