EBay Is Way Too Pricey, but They’ll Jump on American Express

EBay (EBAY)

Jim: Now, Mike, if you think the day traders who dart in and out of stocks like EBay are addicted souls, they’re pikers next to what I understand are the multitudes addicted to buying and selling stuff on EBay, the online auction site.

Mike: Of course EBay is now a great marketplace for all sorts of weird things. Hollywood scripts, human kidneys and, for all I know, the parts that make up a 747 jumbo jet.

Jim: Then there are those really dangerous objects it handles--Beanie Babies.

Mike: I’ve bought things on EBay.

Jim: You have? Like what?

Mike: I bought a Geiger counter on EBay.

Jim: A Geiger counter! Does your house have a green glow or something?

Mike: No, no, but the last time I came home from Russia I brought back some ceramics, and you never know if the Russians made them using clay from somewhere like, oh, Chernobyl. So I wanted to make sure the items were safe.

Jim: You really are crazy, aren’t you?

Mike: So I had a choice: Buy a new Geiger counter for $400 or find one on EBay. There I found one for $47. So I sent my check to the seller, got the Geiger counter, and, I’m happy to report, no radioactivity. Either that or the damned thing doesn’t work. But I am a satisfied customer.

Jim: You’re not alone--I hear lots of people have turned their living rooms into mini-warehouses because they’re so enthralled buying and selling stuff via EBay.

Mike: See? You can find pathology almost anywhere.

Jim: Seriously, EBay gets credit for revolutionizing the way people buy and sell, well, what should we call all that stuff--collectibles? Junk?

Mike: Let’s just say there are collectibles, and there are things that just get collected.

Jim: And EBay still dominates its market, even though several other online sites have gotten into the act. EBay has something like 7 million registered “users,” and at any given time has some 3 million items available for sale.

Mike: Yet any major Internet site could be doing the same. So that’s why EBay’s rivals today now include the likes of Amazon.com and Yahoo.

Jim: EBay’s pioneering effort made its stock one of the Internet’s biggest home runs, and that’s saying a lot. Between the time it went public in September 1998 through last April, the stock skyrocketed 1,200%. But then . . .

Mike: But then this stock went as flat as the bidding for a bootleg video of, well, “My Favorite Martian.” Two main reasons: The increased competition, and periodic glitches in EBay’s system that inevitably make headlines.

Jim: Now, to its credit, for the nine months ended Sept. 30, EBay turned a tiny profit if you back out one-time charges. And its revenue totaled $151 million, about triple the year-earlier level. But with its share price still so high--its total market value is nearly $17 billion--that means the stock is selling for 1,100 times estimated earnings per share for ’99. A little overextended, would you say?

Mike: Let me simplify all of this. Why has EBay stock been mostly flat since August? Because what are the real prospects for this company actually hitting the growth targets that the stock price is assuming today? I bid zilch.

Jim: Exactly, which is why I wouldn’t buy the stock.

Mike: I wouldn’t, either. Jim, you know I’ve bet against the Internet tape consistently over the last year, and I’ve been sorry for it most times. But EBay doesn’t do anything for me.

Jim: And the tape is telling us something this time. Even in recent weeks, when Yahoo and CMGI and some other Net highfliers were soaring again, EBay basically treaded water. And, boy, if even the day traders are giving up on it . . .

Mike: Good point. And let’s analyze what this company is really about: It’s basically one giant flea market. EBay asks a nominal fee from everyone who places an object up for auction.

Jim: And we’ve agreed that’s a lot of objects.

Mike: Right, and the upside is that EBay’s profit margins are almost infinite, because all it has to do is provide the auction’s electronic infrastructure. It doesn’t have to carry any inventory, and, to a great extent, it doesn’t have to put its own reputation behind its buyers and sellers.

Jim: Though it does try to keep safeguards in place.

Mike: Yes, I know. But my favorite EBay story is that some years ago the company won an award for its Web site, and EBay’s people didn’t show up for the ceremony to collect their trophy. So someone else stepped up to the dais--and promptly put the item up for bid on EBay.

Jim: Beautiful. But what’s your point?

Mike: My point is: Do you know any very rich folks who run flea markets?

Jim: No.

Mike: And I got a real chuckle recently when everyone got excited that EBay bought a high-end auction house, you know, so that it could auction off vintage cars and other pricey collectibles.

Jim: Which naturally goes against the image they present as being a mass-market phenomenon like television.

Mike: Right. Mass-market? How many Rolls-Royces do you ever see advertised on TV?

American Express (AXP)

Jim: Up next is American Express--one of the best-known brands in the world, a component of the Dow Jones industrial average and a major financial- and travel-services company that, let’s face it, is doing a lot better than a few years ago.

Mike: Yes, and it’s a stock I wish I’d owned for the past year or two.

Jim: I’d still buy it today. Now, as we all know, American Express was a poster child for the greed-is-good 1980s, when its gold charge card was the status symbol for all yuppies.

Mike: But now anyone can get a gold credit card.

Jim: Not to mention a platinum one.

Mike: What’s next? A gallium-arsenide card?

Jim: Point is, when the ‘90s arrived and greed gave way to a “value” mind-set in those first few years after the 1990 recession, millions of people started balking at paying $50 a year or more just to have an American Express card.

We should note, by the way, that the conventional American Express card isn’t a “credit” card in the normal sense. You’re supposed to pay off your balance every month. But the company also has conventional installment-debt cards, notably its Optima card.

Mike: I was one of those who canceled my American Express card.

Jim: So was I. In addition, American Express typically nicked stores and other merchants for higher transaction fees than did Visa or MasterCard, and so a lot of merchants simply didn’t accept American Express.

Mike: Which is one reason why American Express’ share of the credit-card market went into a long slide in the early ‘90s.

Jim: Exactly. But then along came the gruff Harvey Golub, who took over as chief executive in ’93. He and Kenneth Chenault, a career American Express executive who became president in 1997, have brought the company back.

Mike: In fact, the company’s share of the card market is rising again, and so are American Express’ earnings and hence its stock price. For the nine months ended Sept. 30, the company’s profit climbed a nice 16%, to $1.9 billion, on a 12% revenue gain to $14.2 billion. That means it earned a solid 13 cents per dollar of revenue after taxes, its best margin in a decade.

Jim: And that’s why this stock, at around $160 a share, has surged a handsome 85% over the last two years.

Mike: Yet one of the most attractive things about the stock is that it’s still selling at a discount--albeit not a huge one--to the broad market, at about 29 times the company’s estimated per-share profit for ’99. So to me, the stock is by no means costly even though the company has strong prospects.

Jim: Agreed. Among other things, Golub and Chenault cut some of the merchant transaction fees to make their cards more attractive, and solicited a lot more merchants to accept the card. They’ve also worked hard to cross-promote their cards with other companies, such as Delta Air Lines.

Mike: Now it’s rare to find a merchant who won’t take American Express.

Jim: So in effect Golub and Chenault restored, and are again exploiting, what is a very valuable brand. And let’s not forget: American Express also has a big unit that provides financial-management services for consumers and businesses.

Plus, when I look down the road, I like that Chenault--who’s one of the highest-ranking black executives in Corporate America--is expected to succeed Golub when he retires next year.

Mike: And sooner or later, more investors are going to see all of these attributes and bid American Express higher.

Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the new book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).

EBAy

Friday, $133.81

American Express

Friday, $159.50