evadimensions analysis of amazon, ebay, apple, and...

EVA® is a registered mark of EVA Dimensions (in financial data, software, valuation analytics, and investment management and research) and of Stern Stewart & Co. (in the field of financial and incentive consulting). EVA Momentum and PRVit are registered marks of EVA Dimensions. Copyright 2011 by EVA Dimension. All rights reserved.

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EVA® is a registered service mark of EVA Dimensions LLC (in the field of financial data, valuation analytics, and investment management) and of Stern Stewart & Co. (in the field of financial and incentive consulting). Copyright © 2011 by EVA Dimension LLC. All rights reserved

evaDimensions Analysis of Amazon, eBay, Apple, and Google

The Path to Financial Truth

Financial intelligence for finding alpha

Craig Sterling Managing Director

Head of Global Equity Research (212) 201-2334

[email protected]

Austin Burkett, CFA Senior Vice President

(212) 201-2335 [email protected]

www.evadimensions.com/equityresearch February 27, 2012

2

Summary

For AMZN, GOOG, AAPL, and EBAY, market-implied incremental EVA growth has eroded significantly, and, with the exception of AAPL, recent EVA Momentum has been negative. Embedded expectations for EVA Margin expansion are wide-ranging, from -170 bps to +120 bps per year for next 5 years.

AAPL: EVA Momentum is accelerating and is highest in the group Has the lowest embedded expectations (down 170 bps per year over next 5 years)

GOOG: Group-high EVA Margin is showing signs of strain, with Working Capital + Intangible Charges increasing more than 800 bps

over the last 5 years EVA Momentum is declining; embedded expectations are for a modest decrease AMZN: Lowest EVA Margin of the group, with a declining trend in EVA Margin and Momentum AMZN’s relatively thin EVA Margin is nearly 30% lower than a year ago PP&E Rent Charges were up 100 bps last year, pointing to increasing property costs in the mix Market-implied EVA Margin expectations call for a modest +10 bps per year, which would return the company to its running

average of about 3% since 2005 EBAY: Priced for a significant EVA Margin increase, which would follow an improving trend since 2009 Highest EVA Margin volatility Rankings: GOOG scores best in evaDimensions’ PRVit quant rankings with the largest gap between current valuation and intrinsic value

resulting in a Buy rating. However, we would heed the company’s EVA Momentum downturn. AAPL is an Overweight, and AMZN and EBAY are Holds.

3

EBAY and GOOG have much higher PP&E Rent Charges than AMZN and AAPL. We would expect AMZN to have a higher PP&E Charge, given its warehouse and web services (AWS) exposure.

EBAY’s 21.7% Intangible Capital Rent Charge stands out as high. It is well above GOOG’s 14.4%. This is the period amortization of the capitalized R&D and Ad & Promo expenses.

EVA Income Statement Comparison

Benchmark: Internet Software & Services

Currency: U.S. Dollar 50th AMZN 2011TFQ4 EBAY 2011TFQ4 AAPL 2012TFQ1 GOOG 2011TFQ4

Scale: Values in Millions Percentile Value Percentile Value Percentile Value Percentile Value Percentile

EVA Margins

Sales Growth Rate 24.4% 40.6% 77 27.3% 56 67.6% 90 29.3% 60

Cash Operating Costs (% of Sales) 66.7% 86.4% 14 51.9% 78 61.4% 60 44.6% 95

COGS (Adj) % of Sales 33.0% 77.6% 5 23.9% 67 55.6% 25 30.0% 56

SG&A (Adj) % of Sales 29.6% 8.8% 95 28.0% 53 5.8% 95 14.6% 81

EBITDAR Margin (EBITDAR/Sales) 33.3% 13.6% 14 48.1% 78 38.6% 60 55.4% 95

Productive Capital Rental Charge (% of Sales) 27.6% 9.5% 87 33.2% 36 5.2% 95 27.4% 50

Cap Chrg: Working Capital % of Sales 2.0% -0.2% 95 1.4% 64 0.0% 95 2.8% 36

Rent Chrg: Net PP&E Adjusted % of Sales 8.6% 4.1% 85 10.1% 41 2.9% 95 10.1% 41

Rent Chrg: Intangible Capital AT % of Sales 10.0% 5.5% 65 21.7% 28 2.3% 75 14.4% 42

EVA Before Tax Margin (EVABT/Sales) 5.1% 4.2% 48 14.9% 74 33.4% 90 28.0% 86

EVA Effective Tax Rate 37% 37% 51 23% 77 36% 54 32% 64

Other EVA (% of Sales) 1.4% 0.3% 22 0.9% 35 -3.0% 5 2.5% 64

Rent Charge: Goodwill & Sp Items (% of Sales) 4.7% 0.4% 78 7.9% 35 0.1% 87 2.3% 64

EVA Margin (EVA/Sales) -0.8% 2.5% 60 4.4% 66 18.3% 84 19.4% 85

EVA Momentum

EVA Momentum (% of Trailing Sales) 2.2% 0.1% 33 1.8% 47 15.4% 95 4.9% 62

Implied EVA Momentum 10 Yr (Sales) 2.8% 1.4% 25 2.8% 50 1.4% 26 2.9% 51

PRVit Scores

PRVit Prime Score -- 56 -- 49 -- 75 -- 79 --

PRVit Global Score -- 55 -- 53 -- 76 -- 80 --

Performance Score (P) vs. Global -- 85 -- 80 -- 99 -- 97 --

Risk Score (R) vs. Global -- 30 -- 47 -- 30 -- 18 --

Valuation Score (V) vs. Global -- 87 -- 76 -- 78 -- 77 --

Fiscal Year Ends: December Fiscal Year Ends: December Fiscal Year Ends: September Fiscal Year Ends: December

4

EVA History

GOOG and AAPL lead the group in EVA Margin. However, AAPL’s is accelerating, while others’ are declining.

5

Market Implied EVA Momentum

Early-stage companies typically carry a very high implied EVA Momentum, as future value creation is well above current value creation.

GOOG and EBAY have the highest expectations now, at just under 5.0%, while AMZN and AAPL’s are about half these, in the 2%-2.5% range.

6

EVA Expectations: Future Growth Reliance

These companies carried very high future growth premiums more than a decade ago.

These premiums have declined as the companies have matured. Roughly 40% of company value is ascribed to incremental value creation now versus about 90% in 2004. At above 70%, AMZN is a relative standout.

-10.0%

40.0%

90.0%

140.0%

190.0%

12/31/2002 12/31/2004 12/31/2006 12/31/2008 12/31/2010

Fu

ture

Gro

wth

Re

lian

ce =

FV

A /

Ma

rke

t V

alu

e

AAPL AMZN EBAY GOOG

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

12/31/2008 12/31/2009 12/31/2010 12/31/2011

Fu

ture

Gro

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Re

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ce =

FV

A /

Ma

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t V

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e

AAPL AMZN EBAY GOOG

7

86

85

AMZN 25th 50th 75th % Global

2.5% -4.0% 0.6% 5.2% 63

15.2% -3.3% 0.6% 5.9% 91

74


0.7% -1.5% 0.7% 3.3% 50

7.4% -0.9% 0.4% 2.0% 93

-2.7% -2.6% 0.3% 3.1% 25

30

29


39% 33% 41% 51% 44

0.7% 2.6% 5.8% 13.3% 3

34


-21% 6% -3% -14% 83

74% 36% 15% 6% 14

27% 5% 26% 46% 51

0.7 0.8 2.0 3.9 22

87

94


150% -9% 29% 115% 80

983% -10% 28% 106% 98

85


12.1 5.1 7.5 10.8 81

41.6 13.2 19.5 29.8 85

72% -18% 22% 59% 80

NOPAT Multiple

Future Growth Reliance

MVA Margin

MVA Spread

V2 Wealth Multiples Valuation multiples to cash flow, earnings, EVA

EBITDAR Multiple

Total Debt/Total Capital

Total Debt/EBITDAR

Valuation Score (V) Lower is better

V1 Wealth Ratios Valuation multiples to book capital (as adjusted)

EVA Margin Variability

R2 Vulnerability Leveraged, negative cash flow firms are suspect

Free Cash Flow Rate

Op Cash Gen Return

Risk Score (R) Lower is better

R1 Volatility Variability in stock price and the EVA profit margin

Stock Price Volatility

P2 Trend The growth rate in the firm's economic profit (its EVA)

EVA Momentum (vs Cap)

3 Year Trend (ΔEVA/Cap)

Last Quarter (ΔEVA/Cap)

Performance Score (P) Higher is better

P1 Profitability Financial strength in generating a return on capital over the full cost

EVA Margin (EVA/Sales)

EVA Spread (EVA/Capital)

DateShare

Price

PRVit

Global

Score

PRVit

Prime

Score Vs

SubSector

PRVit

Prime

Score Vs

Country

PRVit

Prime

Score

17-Feb-12 $182.50 55 60 60 57Prime Score Rating versus Global Sub-Sector

Sell0-19

Underweight20-39

Hold40-59

Overweight60-79

Buy80-100

EVA Margin and Momentum is declining and expectations call for a return to 3%. Share price has appeared to follow EVA Momentum.

AMAZON.COM INCAMZN | $83.1B mkt. cap. | $182.50

Internet & Catalog Retail

EVA Margin vs. Share Price

$0

$50

$100

$150

$200

$250

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

3-31-1997 3-31-1999 3-31-2001 3-31-2003 3-31-2005 3-31-2007 3-31-2009 3-31-2011

AM

ZN S

har

e P

rice

(US$

)

EVA

% o

f Sa

les

AMZN Share Price (US$) AMZN - EVA % of Sales EVA Momentum

Implied EVA Margin Implied EVA Momentum



Market Value Added vs. CVA and FVA


-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0%

50%

100%

150%

200%

250%

300%

350%

12-31-1996 12-31-1999 12-31-2002 12-31-2005 12-31-2008 12-31-2011

EVA

Ma

rgin

Futu

re G

row

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elia

nce

Future Growth Reliance = FVA / Market Value AMZN - EVA % of Sales

($20,000)

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

3-31-1997 3-31-2000 3-31-2003 3-31-2006 3-31-2009 2-21-2012

mil

lio

n

Capital Current Value Added (EVA/COC)

Future Value Added (MVA-CVA) Market Value

8

AMZN has grown a substantial market premium to Capital, and EVA Margins have started to decline.

EVA Margin has been declining over the last year, falling from a roughly 3% average since 2005.

Embedded expectations for incremental EVA are fairly high, at about 70% of firm value.

9

AMZN - EVA Margin and Momentum SummaryFiscal Period: 2002TFQ4 2003TFQ4 2004TFQ4 2005TFQ4 2006TFQ4 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4

Period Ending: 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 Trend

Sales 3,933 5,264 6,921 8,490 10,711 14,835 19,166 24,509 34,204 48,077 32.1% CAGR

Sales Growth Rate 26.0% 33.8% 31.5% 22.7% 26.2% 38.5% 29.2% 27.9% 39.6% 40.6%

COGS Adjusted % of Sales 73.8% 76.2% 76.9% 76.0% 77.1% 77.4% 77.7% 77.4% 77.7% 77.6%

SG&A Adjusted % of Sales 14.2% 9.7% 9.7% 8.6% 8.0% 8.2% 8.2% 8.2% 8.4% 8.8%

Cash Operating Costs as % of Sales 88.0% 85.9% 86.6% 84.6% 85.1% 85.6% 85.9% 85.7% 86.0% 86.4%

EBITDAR Margin 12.1% 14.1% 13.4% 15.4% 14.9% 14.4% 14.1% 14.3% 14.0% 13.6%

Cap Chrg: Working Capital % of Sales -0.6% -0.6% -0.6% -0.5% -0.5% -0.5% -0.1% -0.4% -0.2% -0.2%

Rent Chrg: Net PP&E Adjusted % of Sales 5.4% 3.6% 2.7% 3.2% 4.2% 3.5% 3.1% 3.0% 3.1% 4.1%

EVA From Operations Margin 7.2% 11.2% 11.3% 12.7% 11.2% 11.4% 11.1% 11.7% 11.1% 9.7%

Rent Chrg: Intangible Capital AT % of Sales 9.1% 7.5% 6.1% 5.7% 5.7% 5.4% 5.7% 5.7% 5.5% 5.5%

EVA Before Tax Margin -1.8% 3.7% 5.1% 7.1% 5.5% 6.0% 5.4% 6.0% 5.6% 4.2%

EVA Effective Tax Rate EVA Tax % of EVA Before Tax -83.7% 85.2% 63.9% 53.1% 52.3% 47.8% 42.9% 40.0% 37.7% 36.9%

EVA After Tax Margin -3.4% 0.5% 1.9% 3.3% 2.6% 3.2% 3.1% 3.6% 3.5% 2.6%

Other EVA % of Sales -1.0% -1.0% 0.2% 0.7% 0.4% 0.4% 0.5% 0.2% 0.4% 0.3%

EVAxGW&SI Margin -4.4% -0.5% 2.1% 4.0% 3.0% 3.5% 3.5% 3.8% 3.9% 2.9%

Rent Chrg: Goodwill & Special Items % of Sales 0.9% 0.7% 0.5% 0.5% 0.5% 0.4% 0.3% 0.3% 0.4% 0.4%

EVA Margin -5.3% -1.1% 1.5% 3.5% 2.6% 3.2% 3.2% 3.5% 3.5% 2.5%

EVA Momentum (Delta EVA/Trailing Sales) 15.1% 3.8% 3.1% 2.7% -0.2% 1.8% 0.9% 1.3% 1.3% 0.1%

AMZN’s 100 bps EVA Margin decline in 2011 was primarily due to a 100 bps increase in PP&E Rental Charges. This is the most important line item to watch as AMZN expands its warehouse footprint and Amazon Web Services capacity.



10

Assuming consensus sales estimates, AMZN’s EVA Margin needs to increase from 2.5% in 2011 to 3.0% in 2021 (+10 bps per year for next 5 years) to equate to the current market price. In the past 5 years, EVA Margin has ranged from 2.5% to 3.5%.

38.5%

29.2%27.9%

39.6%40.6%

28.9%28.5%26.0%26.0%

19.0%

15.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

20

07T

FQ4

20

08T

FQ4

20

09T

FQ4

20

10T

FQ4

20

11T

FQ4

20

12T

FQ4

20

13T

FQ4

20

14T

FQ4

20

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FQ4

20

16T

FQ4

20

21T

FQ4

Sale

s G

row

th

3.2% 3.2%

3.5% 3.5%

2.5% 2.6% 2.7% 2.8% 2.9% 3.0% 3.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

20

07T

FQ4

20

08T

FQ4

20

09T

FQ4

20

10T

FQ4

20

11T

FQ4

20

12T

FQ4

20

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20

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FQ4

20

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FQ4

20

21T

FQ4

EVA

Ma

rgin



11

Comparing AMZN to its bricks-and-mortar competitors, at 4.1%, its PP&E Rent Charge is only 40 bps lower than WMT’s.

AMZN’s EBITDAR margin advantage is largely wiped out by its relatively high Intangible Capital Charges. Bottom-line EVA Margin is only 40 bps better than WMT’s. SG&A costs are similar to COST’s (WMT’s are nearly double these).

AMZN’s superior Working Capital management is clear, at 50 bps better than WMT’s and COST’s.



Benchmark: Multiline Retail

Currency: U.S. Dollar 50th AMZN 2011TFQ4 WMT 2011TFQ3 COST 2012TFQ1

Scale: Values in Millions Percentile Value Percentile Value Percentile Value Percentile

EVA Margins

Sales Growth Rate 13.0% 40.6% 90 5.0% 22 14.3% 53

Cash Operating Costs (% of Sales) 83.6% 86.4% 39 91.2% 19 96.1% 5

COGS (Adj) % of Sales 60.3% 77.6% 5 74.9% 13 87.5% 5

SG&A (Adj) % of Sales 22.1% 8.8% 95 16.3% 78 8.6% 95

EBITDAR Margin (EBITDAR/Sales) 16.4% 13.6% 39 8.8% 19 3.9% 5

Productive Capital Rental Charge (% of Sales) 14.4% 9.5% 86 5.4% 95 2.7% 95

Cap Chrg: Working Capital % of Sales 0.7% -0.2% 76 0.3% 64 0.3% 66

Rent Chrg: Net PP&E Adjusted % of Sales 11.3% 4.1% 95 4.5% 95 2.4% 95

Rent Chrg: Intangible Capital AT % of Sales 0.4% 5.5% 5 0.6% 44 0.0% 95

EVA Before Tax Margin (EVABT/Sales) 2.3% 4.2% 61 3.5% 57 1.2% 45

EVA Effective Tax Rate 34% 37% 44 35% 47 37% 44

Other EVA (% of Sales) -0.3% 0.3% 74 0.1% 67 0.2% 72

Rent Charge: Goodwill & Sp Items (% of Sales) 0.2% 0.4% 43 0.2% 48 0.0% 68

EVA Margin (EVA/Sales) 0.1% 2.5% 62 2.1% 60 1.0% 54

EVA Momentum

EVA Momentum (% of Trailing Sales) 0.2% 0.1% 49 0.1% 50 0.2% 50

Implied EVA Momentum 10 Yr (Sales) 0.3% 1.3% 80 -0.1% 22 0.0% 25

PRVit Scores

PRVit Prime Score -- 56 -- 62 -- 52 --

PRVit Global Score -- 56 -- 70 -- 61 --

Performance Score (P) vs. Global -- 86 -- 65 -- 67 --

Risk Score (R) vs. Global -- 30 -- 20 -- 7 --

Valuation Score (V) vs. Global -- 87 -- 57 -- 75 --

Fiscal Year Ends: December Fiscal Year Ends: January Fiscal Year Ends: August

12

99

98

AAPL 25th 50th 75th % Global

18.3% -4.0% 0.6% 5.2% 94

42.5% -3.3% 0.6% 5.9% 98

99


42.9% -1.5% 0.7% 3.3% 99

411.3% -0.9% 0.4% 2.0% 100

60.1% -2.6% 0.3% 3.1% 99

30

32


27% 33% 41% 51% 9

2.8% 2.6% 5.8% 13.3% 27

20


-18% 6% -3% -14% 80

239% 36% 15% 6% 4

2% 5% 26% 46% 20

0.0 0.8 2.0 3.9 5

78

95


299% -9% 29% 115% 91

498% -10% 28% 106% 95

62


9.3 5.1 7.5 10.8 66

15.9 13.2 19.5 29.8 35

27% -18% 22% 59% 54

NOPAT Multiple


MVA Margin

MVA Spread


EBITDAR Multiple


Total Debt/EBITDAR





Free Cash Flow Rate

Op Cash Gen Return












DateShare

Price

PRVit

Global

Score

PRVit

Prime

Score Vs

SubSector

PRVit

Prime

Score Vs

Country

PRVit

Prime

Score


Sell0-19

Underweight20-39

Hold40-59

Overweight60-79

Buy80-100

EVA Momentum has defined AAPL share price movement. Market-implied expectations appear very low.


$0

$100

$200

$300

$400

$500

$600

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

3-31-1997 3-31-1999 3-31-2001 3-31-2003 3-31-2005 3-31-2007 3-31-2009 3-31-2011

AA

PL

Shar

e P

rice

(US$

)

EVA

% o

f Sa

les

AAPL Share Price (US$) AAPL - EVA % of Sales EVA Momentum


APPLE INCAAPL | $472.3B mkt. cap. | $502.12

Computers & Peripherals

13





-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

0%

50%

100%

150%

200%

250%

300%

12-31-1996 12-31-1999 12-31-2002 12-31-2005 12-31-2008 12-31-2011

EVA

Ma

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Futu

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row

th R

elia

nce

Future Growth Reliance = FVA / Market Value AAPL - EVA % of Sales

($100,000)

$0

$100,000

$200,000

$300,000

$400,000

$500,000

3-31-1997 3-31-2000 3-31-2003 3-31-2006 3-31-2009 2-17-2012

mil

lio

n



AAPL’s future growth premium has declined as it has grown, with less and less firm value associated with incremental growth.

A brief EVA Margin dip a year ago has reversed, with the firm reaching a new margin high in its latest quarter .

14

AAPL - EVA Margin and Momentum SummaryFiscal Period: 2003TFQ1 2004TFQ1 2005TFQ1 2006TFQ1 2007TFQ1 2008TFQ1 2009TFQ1 2010TFQ1 2011TFQ1 2012TFQ1


Sales 5,839 6,741 9,763 16,190 20,681 26,499 34,751 46,708 76,283 127,841 40.9% CAGR





EBITDAR Margin 8.6% 10.9% 15.5% 19.0% 21.5% 26.3% 27.7% 34.7% 33.4% 38.6%

Cap Chrg: Working Capital % of Sales -0.5% -0.2% -0.1% 0.0% 0.2% 0.0% 0.2% 0.1% 0.0% 0.0%




EVA Before Tax Margin -11.0% -6.4% 2.7% 10.4% 13.3% 18.5% 19.7% 27.6% 27.7% 33.4%

EVA Effective Tax Rate EVA Tax % of EVA Before Tax 41.6% 41.8% 45.9% 40.0% 37.3% 37.0% 36.6% 36.5% 35.4% 35.7%

EVA After Tax Margin -6.4% -3.7% 1.4% 6.2% 8.4% 11.6% 12.5% 17.5% 17.9% 21.4%

Other EVA % of Sales 0.0% 0.9% 1.0% 1.4% 1.4% 1.9% 2.0% -0.2% -2.3% -3.0%

EVAxGW&SI Margin -6.4% -2.8% 2.4% 7.6% 9.7% 13.6% 14.5% 17.3% 15.5% 18.5%


EVA Margin -8.2% -4.3% 1.4% 7.0% 9.3% 13.2% 14.2% 17.1% 15.3% 18.3%

EVA Momentum (Delta EVA/Trailing Sales) -1.8% 3.2% 6.3% 10.2% 4.9% 7.6% 5.5% 8.7% 8.0% 15.4%

Except for Other EVA, AAPL has consistently improved every EVA Margin line item over the past 10 years. AAPL’s Working Capital management is excellent, at 0% of sales. Intangible Capital Charges contain capitalized and amortized R&D expense, and this has declined 200 bps

over last 3 years, pointing to AAPL’s ability to extract large returns from its R&D.



15

Assuming consensus sales estimates, AAPL’s EVA Margin can decline from 18.3% in 2012 to 10.0% in 2017 (-170 bps per year for next 5 years) to equate to the current market price. In the past 5 years, EVA Margin has ranged from 13.2% to 18.3%.

28.1%31.1%

34.4%

63.3%67.6%

50.0%

15.8%

8.3% 8.3% 8.3% 7.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

20

08T

FQ1

20

09T

FQ1

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FQ1

20

11T

FQ1

20

12T

FQ1

20

13T

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20

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Sale

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13.2%14.2%

17.1%

15.3%

18.3%

16.7%

15.0%

13.3%

11.7%

10.0% 10.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

20

08T

FQ1

20

09T

FQ1

20

10T

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20

12T

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20

13T

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20

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20

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FQ1

20

16T

FQ1

20

17T

FQ1

20

22T

FQ1

EVA

Ma

rgin



16

81

76

EBAY 25th 50th 75th % Global

4.4% -4.0% 0.6% 5.2% 72

3.8% -3.3% 0.6% 5.9% 68

74


1.6% -1.5% 0.7% 3.3% 61

1.0% -0.9% 0.4% 2.0% 62

3.4% -2.6% 0.3% 3.1% 77

47

59


39% 33% 41% 51% 42

4.4% 2.6% 5.8% 13.3% 41

27


-11% 6% -3% -14% 71

71% 36% 15% 6% 15

14% 5% 26% 46% 35

0.5 0.8 2.0 3.9 19

76

83


223% -9% 29% 115% 87

183% -10% 28% 106% 84

60


7.2 5.1 7.5 10.8 47

19.4 13.2 19.5 29.8 49

51% -18% 22% 59% 70

NOPAT Multiple


MVA Margin

MVA Spread


EBITDAR Multiple


Total Debt/EBITDAR





Free Cash Flow Rate

Op Cash Gen Return












DateShare

Price

PRVit

Global

Score

PRVit

Prime

Score Vs

SubSector

PRVit

Prime

Score Vs

Country

PRVit

Prime

Score


Sell0-19

Underweight20-39

Hold40-59

Overweight60-79

Buy80-100

EVA Momentum has correlated well with EBAY’s share price. Embedded expectations for EVA Margin growth are high.

EBAY INCEBAY | $45.2B mkt. cap. | $35.06

Internet Software & Services


$0

$10

$20

$30

$40

$50

$60

$70

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

12-31-1997 12-31-2000 12-31-2003 12-31-2006 12-31-2009

EBA

Y S

har

e P

rice

(US$

)

EVA

% o

f Sa

les

EBAY Share Price (US$) EBAY - EVA % of Sales EVA Momentum


17





-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

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-20%

0%

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120%

12-31-1996 12-31-1999 12-31-2002 12-31-2005 12-31-2008 12-31-2011

EVA

Ma

rgin

Futu

re G

row

th R

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Future Growth Reliance = FVA / Market Value EBAY - EVA % of Sales

($10,000)

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

3-31-2000 3-31-2003 3-31-2006 3-31-2009 2-17-2012

mil

lio

n



EBAY had extremely high expectations in 2005, with upwards of 90% of firm value associated value creation beyond EVA in perpetuity.

During the market drop in early 2009, EBAY’s expectations for incremental growth hit 0%, meaning there was an expectation for zero value-added growth beyond EVA in perpetuity.

Since, EBAY’s valuation has recovered to a point where 50% of firm value is incremental value creation.

18

EBAY - EVA Margin and Momentum SummaryFiscal Period: 2002TFQ4 2003TFQ4 2004TFQ4 2005TFQ4 2006TFQ4 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4


Sales 1,214 2,165 3,271 4,552 5,970 7,672 8,541 8,727 9,156 11,652 28.6% CAGR





EBITDAR Margin 31.9% 44.7% 51.1% 51.9% 55.0% 54.6% 52.4% 49.4% 50.8% 48.1%

Cap Chrg: Working Capital % of Sales 2.1% 2.2% 2.2% 0.1% -0.6% -1.2% 1.0% 2.1% 2.1% 1.4%




EVA Before Tax Margin 4.1% 15.2% 21.1% 22.9% 23.8% 25.4% 18.6% 11.2% 13.2% 14.9%

EVA Effective Tax Rate EVA Tax % of EVA Before Tax 63.5% 36.3% 36.2% 34.9% 35.0% 35.0% 30.9% 21.4% 21.6% 23.3%

EVA After Tax Margin 1.5% 9.7% 13.5% 14.9% 15.5% 16.5% 12.8% 8.8% 10.3% 11.5%

Other EVA % of Sales 1.7% 1.3% 2.3% 1.9% 2.6% 2.8% 2.4% 2.1% 2.0% 0.9%

EVAxGW&SI Margin 3.2% 10.9% 15.7% 16.8% 18.1% 19.3% 15.2% 10.8% 12.3% 12.3%


EVA Margin -0.9% 1.7% 7.7% 7.0% 4.5% 7.4% 3.7% -0.9% 3.9% 4.4%

EVA Momentum (Delta EVA/Trailing Sales) 8.5% 3.9% 9.9% 2.0% -1.1% 5.0% -3.2% -4.7% 5.0% 1.8%

EBAY’s PP&E Charge runs at a seemingly high 10.1% relative to other companies that have larger property exposure.

EBAY’s 27% sales growth in 2011 was accompanied only 50 bps of EVA Margin expansion, whereas 2010’s 4.9% sales growth translated into 480 bps of EVA Margin expansion.



19

Assuming consensus sales estimates, EBAY’s EVA Margin needs to increase from 4.4% in 2011 to 10.5% in 2016 (+120 bps per year over next 5 years) to equate to the current market price. In the past 5 years, EVA Margin has ranged from -0.9% to 7.4%.

28.5%

11.3%

2.2%

4.9%

27.3%

19.2%

14.3%14.0%14.0%14.0%

10.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

20

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7.4%

3.7%

-0.9%

3.9%4.4%

5.7%

6.9%

8.1%

9.3%

10.5% 10.5%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

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20

97

97

GOOG 25th 50th 75th % Global

19.4% -4.0% 0.6% 5.2% 95

29.7% -3.3% 0.6% 5.9% 97

94


8.3% -1.5% 0.7% 3.3% 89

9.1% -0.9% 0.4% 2.0% 95

4.6% -2.6% 0.3% 3.1% 81

18

33


31% 33% 41% 51% 19

2.7% 2.6% 5.8% 13.3% 26

4


15% 6% -3% -14% 12

93% 36% 15% 6% 11

10% 5% 26% 46% 30

0.3 0.8 2.0 3.9 14

76

92


356% -9% 29% 115% 93

491% -10% 28% 106% 95

62


7.7 5.1 7.5 10.8 53

15.9 13.2 19.5 29.8 35

40% -18% 22% 59% 64

NOPAT Multiple


MVA Margin

MVA Spread


EBITDAR Multiple


Total Debt/EBITDAR





Free Cash Flow Rate

Op Cash Gen Return












DateShare

Price

PRVit

Global

Score

PRVit

Prime

Score Vs

SubSector

PRVit

Prime

Score Vs

Country

PRVit

Prime

Score


Sell0-19

Underweight20-39

Hold40-59

Overweight60-79

Buy80-100

GOOG’s EVA Momentum declined before a large drop in its shares, and it is declining again. Expectations are for a slight EVA Margin decrease.


$0

$100

$200

$300

$400

$500

$600

$700

$800

-5.0%

0.0%

5.0%

10.0%

15.0%

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30.0%

12-31-2003 12-31-2005 12-31-2007 12-31-2009 12-31-2011

GO

OG

Sh

are

Pri

ce (U

S$)

EVA

% o

f Sa

les

GOOG Share Price (US$) GOOG - EVA % of Sales EVA Momentum


GOOGLE INCGOOG | $199.0B mkt. cap. | $604.64


21





0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

12-31-1996 12-31-1999 12-31-2002 12-31-2005 12-31-2008 12-31-2011

EVA

Ma

rgin

Futu

re G

row

th R

elia

nce

Future Growth Reliance = FVA / Market Value GOOG - EVA % of Sales

$0

$50,000

$100,000

$150,000

$200,000

$250,000

3-31-2006 3-31-2009 2-17-2012

mil

lio

n



GOOG’s EVA Margin appears to be rolling over, and its proportion of incremental value creation is still high, at around 40%.

22

GOOG’s EBITDAR Margin has been hitting high points for the last 3 years, but its Intangible Capital Charges (R&D and Ad & Promo expense-driven) have ramped up, and PP&E Charges have been volatile, leading to an EVA Margin that declined from its 2006 peak.

Working Capital Charges have increased 90 bps over last 5 years.



GOOG - EVA Income StatementFiscal Period: 2003TFQ4 2004TFQ4 2005TFQ4 2006TFQ4 2007TFQ4 2008TFQ4 2009TFQ4 2010TFQ4 2011TFQ4

Period Ending: 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 Trend

Sales 1,466 3,189 6,139 10,605 16,594 21,796 23,651 29,321 37,905 50.2% CAGR

Sales Growth Rate NA 117.6% 92.5% 72.8% 56.5% 31.4% 8.5% 24.0% 29.3%

COGS Adjusted % of Sales 40.3% 42.0% 37.2% 35.2% 34.3% 32.7% 31.0% 30.8% 30.0%

SG&A Adjusted % of Sales 16.3% 14.2% 14.9% 12.7% 14.6% 14.7% 12.5% 13.1% 14.6%

Cash Operating Costs as % of Sales 56.6% 56.3% 52.1% 47.9% 48.9% 47.4% 43.5% 43.9% 44.6%

EBITDAR Margin 43.4% 43.7% 48.0% 52.1% 51.1% 52.6% 56.5% 56.1% 55.4%

Cap Chrg: Working Capital % of Sales 1.1% 1.4% 1.7% 1.9% 2.1% 2.4% 2.6% 2.5% 2.8%

Rent Chrg: Net PP&E Adjusted % of Sales 6.3% 7.2% 7.4% 9.3% 10.6% 12.2% 12.2% 8.8% 10.1%

EVA From Operations Margin 36.0% 35.2% 38.9% 40.9% 38.4% 37.9% 41.7% 44.7% 42.4%

Rent Chrg: Intangible Capital AT % of Sales 18.9% 10.6% 7.6% 6.6% 8.4% 11.1% 13.0% 13.6% 14.4%

EVA Before Tax Margin 17.1% 24.6% 31.3% 34.4% 30.0% 26.8% 28.7% 31.1% 28.0%

EVA Effective Tax Rate EVA Tax % of EVA Before Tax NA 42.0% 40.0% 38.1% 35.4% 34.2% 35.2% 33.9% 31.6%

EVA After Tax Margin NA 14.3% 18.8% 21.3% 19.4% 17.7% 18.6% 20.6% 19.2%

Other EVA % of Sales -1.3% -0.2% 1.0% 1.8% 2.0% 0.3% 0.8% 2.0% 2.5%

EVAxGW&SI Margin 8.7% 14.1% 19.7% 23.0% 21.3% 18.0% 19.4% 22.6% 21.6%

Rent Chrg: Goodwill & Special Items % of Sales 0.7% 0.6% 0.6% 0.7% 1.6% 2.7% 2.6% 2.4% 2.3%

EVA Margin 8.0% 13.5% 19.2% 22.3% 19.8% 15.3% 16.9% 20.2% 19.4%

EVA Momentum (Delta EVA/Trailing Sales) NA 21.4% 23.4% 19.3% 8.6% 0.3% 3.0% 8.2% 4.9%

23

Assuming consensus sales estimates, GOOG’s EVA Margin can decline from 19.4% in 2011 to 17.0% in 2016 (-50 bps per year for next 5 years) to equate to the current market price. In the past 5 years, EVA Margin has ranged from 15.3% to 20.2%.

56.5%

31.4%

8.5%

24.0%

29.3%

20.4%18.6%

11.0%11.0%11.0%8.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

20

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19.8%

15.3%

16.9%

20.2%19.4%18.9%18.4%18.0%17.5%17.0% 17.0%

0.0%

5.0%

10.0%

15.0%

20.0%

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