Amazon vs. Bed Bath & Beyond: How to compare values of companies
Tuesday, May 3rd, 2016
I’ve been managing money for over 30 years, and while the mind can play tricks on us, I really cannot recall a crazier time in the stock market than the present time.
There are companies with good business models, strong fundamentals and report good earnings, yet the stock price declines. However, there are other companies with weak fundamentals and their stock price is extremely overvalued, but due to the popularity of the company name, the stock price continues to increase.
I have often said the stock market is a crazy place on the short-term, but in the long-term it makes sense. When an investor buys fundamentally strong companies and pays a reasonable price for them, the investments should do well over time.
Crazy times like these are not good for investors, because they get sucked into the fallacy that these well-known, overpriced companies will continue to increase in value. Read any good investment book and you will see time-after-time, when you overpay for any type of stock, sooner or later you will be burned.
What bothers me is when this eventually occurs, those that held these stocks will say the stock market is risky and not a safe investment. I have proven time and time again when you invest for the longer-term, into fundamental strong companies, you should benefit from your investments.
When I look at a company, I compare it to the industry average.
Today I am going to compare two retailers; one that is overpriced and the other underpriced. The reason for the two extremes is while one company is hyped up because of who they are, the other company is beaten down because investors foresee no future for this well-run, value company.
I am not going to tell you which one is which; we will play a game and see if you can figure it out.
The first company is Amazon.com Inc. (AMZN), which has a 52 week high of $696 and 52-week low of $415. The stock currently trades around $659, and the company has a current market capitalization of $311 billion.
The second company is Bed Bath & Beyond (BBBY), which has a 52-week high of $74 per-share and 52-week low of $41 per share; the stock currently trades around $47 per-share. The company has a market capitalization of $8 billion.
Looking ahead to the year end, December 2017, the earnings-per-share for Amazon are expected to be $9.82. Based on the current stock price, investors are paying 67 times forward earnings for Amazon.
Now, I know people are saying Amazon is growing so rapidly it will catch up. This is not so; even skipping out to December 2020, the earnings-per-share estimates are only $29.59. If they can meet that number with no business disruption or competition for the next 4 1/2 years, investors are still paying 22 times forward earnings.
I will remind you that investors start to get nervous when the stock market trades between 17-20 times earnings. My question is, buying the stock now, should it go up in value between now and the year 2020?
Let's compare these numbers to Bed Bath and Beyond. I had to use February 2018 since this company reports on a fiscal year, and it is only two months longer than December 2017. The company is expected to earn $5.30. With the stock currently trading at $48 /share, investors are only paying nine times forward earnings.
Based on forward earnings, those buying Amazon stock paid seven and a half times forward earnings over Bed Bath and Beyond. Looking forward, which one do you think has the most potential to increase in value over the next 2-3 years, with the lowest risk? I forgot to add that Bed Bath and Beyond pays approximately a 1.2% dividend, compared to Amazon who pays nothing to investors.
When it comes to safety of principal, the balance sheet is important for investors because you want to make certain the company and stock will be around long-term. While things may be going well now and the balance sheet may not seem important, when things aren't going well, that debt and lack of liquidity can be a big problem for the company. This can cause the stock to take a tremendous fall.
Bed Bath and Beyond has a debt-to-equity of 58.6, compared to Amazon’s 61.5. Liquidity for a company is important and is measured by the current ratio. Bed Bath and Beyond has a current ratio of 2.1, nearly twice that of Amazon at 1.1.
If hard times were to come, one would have to assume that Bed Bath and Beyond would be in a much better position and be able to pay their bills than Amazon.
There are two important ways to measure profitability; the first is the net profit margin. The second would be return on equity, which gives a fair comparison of companies with a lot of volume or turnover.
Bed Bath and Beyond has a very good profit margin at 7%, which is well above the industry average of 2.9%.
Amazon’s net profit margin is at 0.6%. I know this will increase for Amazon in the future, but Bed Bath and Beyond already has a good net profit margin and I don't see it decreasing.
The return on equity for Amazon is not very impressive at 4.9%, well below the industry at 16.5%. Compare that to Bed Bath and Beyond at 31.7%, and the investor can see it will be a long time before Amazon comes close to matching Bed Bath and Beyond’s fantastic return on equity.
I think it is easy to see where the best value for your money is, but that doesn't mean next week or even next month Amazon’s stock gets cut in half and Bed Bath and Beyond will double in price. It means over the long-term, Bed Bath and Beyond should do well since this great company is on sale, and Amazon is well overpriced.
The best case scenario I see for Amazon is 2 to 3 years from now, the stock will still be somewhere around current levels, which will provide investors a zero return over that timeframe.
It is very important for investors to have an immense amount of patience and a strong understanding of the businesses they are invested in. When one does, the stock market is not such a crazy place over the long-term.
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 a financial analyst for Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.
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