2 Are Better Than 1: eBay Inc (EBAY), Target Corporation (TGT), Facebook Inc (FB)

Faster Growth = Higher Multiple
In the stock market, companies that are expected to grow earnings at a faster clip are routinely awarded a higher multiple. The standout example is Amazon, which is expected to post better than 40% EPS growth in the next few years, and sells for over 180 times projected earnings. Facebook is also growing fast, with analysts calling for 29% earnings growth from the social network. In response, the stock sells for nearly 50 times projected earnings. Even Target Corporation (NYSE:TGT) sells for a PEG of 1.2, with an expected 11.7% growth rate, and shares are trading at 14 times projected earnings.

Though PayPal might never match Amazon’s multiple, Facebook sells for 1.72 times its growth rate. Considering that PayPal has been growing revenue by 25% on average, and Facebook is expected to see 29% EPS growth, it’s not a stretch to assume that PayPal’s earnings might grow by the same amount over time. This comparison means PayPal might sell for a PEG of 1.7 or more. eBay would likely be marked down to a multiple slightly above Target Corporation (NYSE:TGT) because of its slower growth. However, the company’s high margin business should command a premium PEG ratio of at least 1.3 or 1.4 times its growth rate.

A 28% Premium At Least
The eBay division (with GSI thrown in) makes up 58.34% of revenue. This proposed company’s average revenue growth rate has been 12.4% in the last five quarters. With a multiple of 1.3 to 1.4 times growth, the shares would probably carry a P/E ratio between 16 and 17.

PayPal makes up 41.66% of revenue, and has grown revenue at an average rate of 25%. If PayPal carried a PEG of 1.7, the shares would trade for a P/E of 42. If you add these figures together, the combined company should have a weighted P/E ratio of 17.50 for PayPal, and at least 9.33 for eBay Marketplace and GSI.

This combined multiple of 26.83 is a roughly 28% premium to what the stock currently sells for. The bottom line is at over 40% of revenue, PayPal is all grown up. This division needs to be separated from eBay so the market can value its growth more appropriately. In this case, 2 companies are clearly better than 1.

The article 2 Are Better Than 1 originally appeared on Fool.com and is written by By Chad Henage.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.