How Can PayPal Catalyze Multiple Expansion For Shares?

Excluding anomalous items, the 1Q non-GAAP operating margins of Paypal Holdings Inc PYPL were flat rather than down, Jefferies’ Jason Kupferberg noted in a report. He maintained a Buy rating for the company, with a price target of $48, saying that there could be meaningful underlying improvement in operating margins this year.

Excluding onetime items, such as FX hedging gains, the acquisition of Xoom Corp XOOM, the gain in 2015 on credit receivable sale and the amended agreement with Synchrony Financial SYF, shows adjusted non-GAAP operating margins at 19.9 percent in 1Q16, flat y/y rather than down 70 bps, analyst Jason Kupferberg mentioned.

Kupferberg expects PayPal to generate 130 bps margin expansion in 2016 to 19.8 percent, as compared to the 50 bps contraction in reported terms.

Medium-Term Guidance Achievable

PayPal reiterated its medium-term guidance for non-GAAP operating margins to be flat to up y/y. “Even inclusive of the headwinds mentioned above, we believe this outlook is achievable, given the leverage potential of non-transaction expense,” the analyst wrote.

Kupferberg expects the company to achieve margin expansion through tight control of non-transaction expense. PayPal had total non-transaction expense of $3.85B in 2015, representing 41.8 percent of its total net revenues. The company is expected to record non-transaction expense growth of 9 percent per year in 2016 and 2017, versus revenue growth of 15.5 percent.

“We believe this expense forecast could prove conservative, given the tighter controls being implemented under the leadership of CFO John Rainey, who has extensive expense management expertise from his previous tenure in the airline industry,” Kupferberg commented.