ANALYST WATCH: eBay bulls finally have their day

A handful of analysts upgraded eBay shares ahead of Thursday’s impressive fourth-quarter earnings report, providing not only vindication for those who stuck by the stock through a sell-off, but a rare example of how some research and a little luck can pay off.

Typically, brokerage firms react to earnings reports, either by upgrading the stock following a good quarter or bashing the company for missing estimates.

The after-the-fact chatter has become so common that cynics watching the pre-earnings upgrades of eBay had to wonder if these bullish analysts were tipped off. In fact, they did their homework and got a little lucky.

eBay, which easily topped analysts’ estimates in its fourth quarter Thursday and boosted its fiscal 2001 sales target by $35 million, has taken a lot of heat in the analyst community in the past two months, sending the stock on an unfettered decent to as low as $26.75 in December.

Throughout its collapse, several analysts maintained their “buy” or “strong buy” recommendations while others, to quote Lehman Brothers’ Holly Becker, threw in the towel.

On Tuesday, WR Hambrecht analyst Derek Brown beat the rest of the pack to the punch when he encouraged his clients to buy eBay ahead of its earnings report, based on the company’s announcement that it would increase listing fees at month’s end, strong traffic figures from Media Metrix and growing demand abroad.

“We believe this price increase is a powerful indicator of the health of eBay's franchise and of the company's superior competitive positioning,” he wrote in Tuesday’s research report.

Following Thursday’s earnings report, Brown upgraded the stock from a “buy” rating to a “strong buy” and expanded on his pre-emptive strike.

No guts, no glory

“I’ve been pounding the table on eBay for the past two months,” Brown said. “I happened to find the fee increase information on its Web site by accident before it was widely reported in the media. This is a significant milestone considering it’s the first time they’ve raised fees in more than four years.”

Brown then fired off his research note, calling eBay his favorite mid-cap idea for 2001, and watched as others followed his lead.

It makes perfect sense but one wonders why the rest of the analysts following eBay didn’t make their bullish calls ahead of the earnings report. Surely, if the company was raising listing fees it wasn’t too worried about demand.

“If I believe strongly in a company and that it will exceed estimates, it’s in my interests to get that out ahead of the earnings report,” he said. “I don’t know what other people were thinking, rightly or wrongly, but I think some were a little gun-shy after watching so many of the other Internet companies they follow go down the drain.”

Brown wasn’t the only analyst to praise eBay ahead of its earnings report, but he was the first to send out a widely disseminated research report.

On Wednesday, Deutsche Banc Alex. Brown analyst Jeetil Patel upgraded the stock from a “market perform” rating to a “buy.”

“The listings increase was the main reason for my upgrade,” Patel said Thursday. “It was clear eBay’s business was much stronger than our projections called for.”

The timing of such a significant announcement was a bit curious but not a violation of securities law.

With all the constraints placed on public companies, particularly regarding the dissemination of market-sensitive information, it was a bit unusual for eBay to deliver the news ahead of the earnings report.

"We can't regulate press releases," said John Heine, a spokesman for the Securities and Exchange Commission. "There are no rules per se regarding that type of release but the SEC has taken steps to advise companies to be very careful how they handle market-moving material."

Patel had a theory as to why other eBay analysts didn’t raise estimates or upgrade the stock even though everyone knew they were likely to post better-than-expected sales and earnings.

“Consumer spending has weakened rapidly and since this is the first real slowdown in the Internet industry’s history, I think some people chose to take a more cautious stance,” he said.

Prudential Volpe analyst Mark Rowen sure wasn’t cautious. He reiterated his long-standing “strong buy” rating Tuesday as well as his 12-month price target of $125 a share.

“eBay announced that it will increase listing fees by a minimum of 10 percent starting Jan. 31,” he wrote in a research note. “Management downplayed the positive financial impact of the change in fee structure; however, we believe it could add an additional 5 percent to future online revenue.”

Other analysts were quick to make positive comments after the news hit.

Monday morning quarterbacking

Dain Rauscher Wessels analyst George Sutton upped his 12-month price target to $60 a share from $50 Friday and reiterated his “buy” recommendation.

Wit SoundView’s Shawn Milne reiterated a “buy” recommendation and Robertson Stephens’ Lauren Cooks Levitan reiterated her “strong buy” rating and upped eBay’s sales and earnings estimates for 2001 and 2002.

“Given the leverage in the eBay business model, we believe these revised estimates could prove highly conservative,” she wrote in Friday’s research report. “We believe investors should react positively to eBay’s impressive Q4 results and extremely positive outlook, particularly against a backdrop of Internet companies and retailers reporting disappointing earnings results and lowering expectations.”

Investors did react positively as the stock shot up $3.63, or 8 percent, to $50.50 Friday after starting the week at $40.06.

Despite eBay’s performance and improved outlook, especially in the wake of Yahoo’s decision
to charge auction fees, three of the 29 analysts following the stock still rate it a “hold.”

Lehman’s Becker, who helped send eBay shares into a nosedive when she cut the stock to “neutral” back in November, was unable to return several phone calls in the past two days.

While Brown and the other proactive analysts were pleased by eBay’s quarter and improved outlook, they all realize things can change quickly.

“Yeah, it always feels good to be right,” Brown said. “But it never fully makes up for all the times that you’re wrong. And I’ve been wrong a few times, too.”