eBay reports 4Q14 earnings: Investors need to watch this company in 2015 (Part 2 of 11)

What will drive eBay’s earnings in 2015?

By Patricia Garner Mar 5, 2015 12:20 pm EDT

eBay’s earnings in 2015

Earnings per share (or EPS) is an important metric that signifies the profitability of a company. eBay’s (EBAY ) EPS was $0.90 in 4Q14. In comparison, Amazon (AMZN ), eBay’s peer, had an EPS of $0.45 per share. In fact, Amazon beat all the analysts’ EPS estimates, which resulted in Amazon’s stock soaring 22% over the last month.

As the chart below shows, Alibaba’s (BABA ) EPS was $0.81, beating analysts’ estimates by $0.06. This is very close to eBay’s figure, which is why eBay’s management is focusing on improving EPS in 2015.

Key drivers for eBay’s EPS

In eBay’s earnings call, management highlighted five key drivers that will drive or detract from eBay’s earnings per share expectations for 2015.

First, eBay’s management plans to reduce its workforce by 7% in 2015. as we read in the previous article. This move will generate savings of more than $300 million across the company and will result in a GAAP (generally accepted accounting principles) charge of approximately $100 million in the first quarter. But these savings will be reinvested to drive growth.

Second, the company will add approximately $1 billion to its top line of revenue in 2015. This revenue growth, coupled with strong margins across the businesses, will generate $0.30 per share of earnings.

Third, eBay repurchased $4.7 billion in shares of common stock in 2014. eBay’s board of directors also approved an increase of the outstanding authorization by $2 billion, which leaves a remaining $3 billion authorization. eBay plans to offset dilution from this by reducing the share count in 2015. This will add approximately $0.10 to the EPS.

Fourth, the currency headwinds could have a large negative impact since eBay generates more than 50% of its revenue outside the United States. eBay’s management mentioned that currency translation, net of hedges, could negatively impact EPS by $0.10–$0.15 per share in 2015. For more on this, read Impact of currency headwinds on eBay’s 2015 projected revenue.

Finally, the dis-synergy costs associated with the separation of eBay and Paypal will increase ongoing costs in 2015 by $200 million, or approximately $0.10–$0.15 per share.

Investors can consider ETFs such as the Dow Jones Internet Index Fund (FDN ) for portfolio exposure to eBay. This ETF has about 5.3% of its portfolio invested in eBay.

Another ETF to consider for investing in the retail sector is the SPDR S&P Retail ETF (XRT ), which has about 1.2% of its portfolio invested in Amazon.