Rivers flow downhill and Amazon is in serious danger of breaking the damn when it turns back this time.
Having just come off a horrendous earnings and outlook just a month ago that sent the stock into a power dive from $47 to $39, the stock made an incredible recovery based on a lot of prescient betting that it would be added to the S&P. It may continue to have a little power for a week or so based on their new digital music service until someone notices that no one with an Ipod (80% of the market) cares.
So, now that the stock is back at $48, a 52 week high it might be time to take a closer look:
Earnings should be about $8Bn, up 13% from last year but earnings are barely going to crack $400M a 30% reduction from last year. Amazon is one of a legion of companies who have blamed the Hurricanes for their troubles but it looks deeper than that to me.
Red Flag #1: SG&A are out of control. Worse than that, rather than cut spending, Amazon reclassified 1/3 of SG&A to R&D. Not only did they not cut back on the problem but now those 2 categories are up 13% over the first quarter’s bloat. Somehow this item has gone from 7% of sales in 1996 to over 15% of sales today – not a recipe for success.
Red Flag #2: Cost of Revenue is creeping up, now almost 75% of sales.
So that’s 90% of sales gone and we haven’t even paid taxes.
Red Flag #3: $1.8Bn in debt. This is a stunning amount!
Red Flag #4: $1.3Bn in Accounts Payable. This one is very disturbing because it was only $1Bn in the 1st quarter when sales were higher! Receivables are only $280M, double what it was in ’03.
Hmm, that’s a lot of flags. I’m not even counting the fact that the company has a negative shareholder equity value and even negative net tangible assets since these are really just a summary of the other problems. For reference, Ebay has an Equity Value of $7Bn with Tangible Assets of $4Bn while Sears has EV of $4.5Bn and TA of $4.5Bn. Ebay is worth $62Bn while SHLD and Amazon both fetch $20Bn in market cap (but Sears has all that lovely real estate..)
Sears has kept their cost of revenue at about 75% of sales too but their SG&A is a painful 22% (it is so annoying to have to have an actual store!). Still Sears made $1Bn in ’05 and they have been slashing costs so these are two trains heading in opposite directions.
Suffice to say that Amazon looks problematic and, at a p/e of 42 compared with Wall Mart at 19 and Sears at 11, I really don’t think this is a smart retail play.
At their current p/e they are priced to perfection if they can grow 15% annually but any misstep, like we saw at last earnings, and this stock could dive.
S&P funds are buying this stock because they have to. You certainly don’t! Best bet here is to wait a week or so and then enter a short as the profit taking begins.
