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Stock Analyst Update

Third Quarter Proves Kind to WaMu, UPS, and EBay

Learn why we are impressed with these three reports.

Below are selected Stock Analyst Note updates for Thursday, Oct. 21. Click here to see a list of all Notes available to Premium Membership subscribers.

The collective sigh of relief heard in the market Thursday morning is likely coming from investors in  Washington Mutual WM, which reported its third-quarter results last night. Our $46 fair value estimate may increase slightly because the company's retail banking operations, hedging effectiveness, and continued cost reductions helped overcome lower mortgage volume. Additionally, we approve of the announced dividend hike from $0.44 to $0.45 per share, a positive signal to shareholders, in our opinion. WaMu reported net income of $674 million on a 53% year-over-year drop in loan volume. Two thirds of all loans originated during the quarter were adjustable rate loans, which will be largely retained on the balance sheet to earn future spread revenue. Revenue was mixed as lower margins hurt spread revenue while retail banking growth was offset by lower gains from the sale of mortgages. We remain impressed with the retail banking story, and we believe that WaMu can generate value for investors once it completes its cost reductions.
Jim Callahan, CFA

 United Parcel Services' UPS excellent results in the third quarter, announced Thursday, reaffirm our $84 fair value estimate for the company's shares. The company's businesses all delivered healthy results, and, as in the last few years, its international operations excelled. International operating profit almost doubled since the third quarter of last year (from $468 million to $803 million) on a 7.6% increase in package volumes, reflecting significant operating leverage. UPS also preserved its superior margins in the more-mature U.S. market and continues to make headway in Asia, with increased landing slots in China and more Asia-to-Europe service. We are particularly pleased that the company's board increased its authorization of share repurchases as well, which bodes well for shareholders and signifies prudent allocation of the firm's ample cash flow.
Nicolas Owens

 EBay's EBAY third-quarter results were right in line with our expectations, and the company is on track to meet our full-year revenue and earnings estimates. Management's increased revenue guidance for the full fiscal 2004 is in line with our previous estimate, and, while the earnings forecast for 2005 is a little below our current estimate, the difference isn't large enough to impact our fair value estimate of $64 per share. Continuing the recent trend, international auction revenues led the pack with 82% growth year over year, followed by the payments business (mostly PayPal) with 56% growth and U.S. auctions with 29% growth. Altogether, revenues increased 52% year over year, and both gross margins and operating margins showed continued expansion. As much as we love the business, however, we still think that the stock looks very pricey.
Joseph Beaulieu

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