Amazon delivers, but not in earnings

Tuesday, November 4th, 2014

Well, we made it through October, probably one of the most hated months of the year in the stock market, but as I said earlier, it gets a bad rap.

When looking over history, one will find that October is in the middle as far as being the worst-performing month of the year. I can't take away the fact that this October was very volatile and for some, the fear got to them, and they panicked and sold their positions at low prices.

At my next client event, which I hold each quarter, I will be very happy to show them the millions of dollars we invested during the downturn in October. The reason I did so much buying was that as the prices of stocks fell, the fundamentals to buy improved. This is why fundamental analysis is worth all the time, effort and labor to understand the true value of a business on the longer term.

One company that I have written about often is Amazon (Nasdaq: AMZN). This stock has traded at high valuations for years, with the hope that the investments the company is making for the future will deliver profits in the longer term.
I think investors have been very patient waiting for the results of Amazon to show profits. However, investors' patience is running thin after the last earnings report when Amazon lost 95 cents for the quarter - a loss that was 28 percent worse than the expected loss of 74 cents per share.

After the stock reached a high of $408 about February, it has fallen to less than $300 per share after the recent embarrassing quarterly loss.

The fundamentals of this company continue to amaze me by how the stock can trade at such high levels with such weak fundamentals.

The company has no price-to-earnings ratio because the

company has no profits; the industry has a high price-earnings ratio of 50.5. Price to sales is 0.8 for the industry and Amazon shows up with a price to sales of double the industry average of 1.6.

While it is high at 19.4, at least the company has a price-to-tangible-book value; however,

it is nearly three times the industry average at 7.1. Investors are paying 33 times the current price to cash flow, which is double the industry average of 16.

The company pays no dividends so investors must hope for stock appreciation.

On the bright side, Amazon's sales have risen 21.5 percent year over year the last 12 months - over four times the industry average rate of 4.6 percent. An investor looking at the earnings-per-share growth year over year for the last 12 months would be very disappointed by seeing earnings decline by 267.7 percent.

This is far higher than the industry average decline of 16.2 percent. I believe Amazon accounts for a large amount of that decline.

The balance sheet for Amazon looks OK. However, it gives no justification for taking a risk for investing your money into Amazon. The industry current ratio is 1.2, slightly better than the current ratio for Amazon at 0.9. Debt to equity does favor Amazon at 30.0 - better than half the industry average at 71.2.

The return on equity for Amazon is a negative 2.2, which follow suit with many of the negatives in this company. The industry is a positive 10.6. The net profit margin for Amazon is a negative 0.3 percent when the industry makes 1.6 percent at the bottom line.

Receivable turnover checks in at 57.7 for the industry average over the last 12 months - more than twice the disappointing turnover of 22.9 for Amazon. With the number of products Amazon sells, it does have a very good inventory turnover of 9.1 - far above the industry at 5.8.

While this is a good number, it does not justify buying the stock until the company can post positive earnings, and investors can buy those positive earnings at a reasonable price.

For the year ending December 2014, the mean average by 36 analysts shows the company will lose 58 cents per share. It is important to note the wide range of analyst estimates; the lowest is looking for Amazon to lose a $1.37 for the year ending December 2014 and the high is $1.09.

Looking to December 2015, the mean average by 39 analystslooks for earnings per share of a $1.18. With the stock trading about 

$300 a share, this shows investors are spending 254 times forward earnings based on the average estimate of the $1.18.

The numbers that make up that $1.18 show how unlikely that earnings per share will be met with such a wide range - one analyst is looking for the company to lose $1.09 per share and another is looking for the earnings per share to come in at $3.17, with the other 37 spread across that range. It is also important to note that over the last 60 days, analysts have dropped these December 2015 earnings per share by nearly 40 percent from $1.94 to the current $1.18.

So while some traders and stock buyers think Amazon will be the next big hit, they need to take a closer look at the fundamentals and realize that good earnings for this company are in the far distant future.

Until this company can demonstrate some strong quarterly earnings, the stock price could continue to hover around current levels or decline even further.


Do you have a question or a company you'd like me to take a look at? Email me at brent@wilseyassetmanagement.com!

Wilsey is president of Wilsey Asset Management and can be heard at 8 a.m. every Saturday on KFMB AM760. Information is provided by Reuters.

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