Tag Archives: Amazon

Whole Foods Market (WFM), again

June 20, 2017 By in mergers and acquisitions, supermarkets, Uncategorized, Whole Foods Tags: , , , , 1 Comment

another bidder?

WFM and Amazon (AMZN) announced late last week that the two firms had agreed to a friendly deal under which AMZN would acquire all the shares of WFM for $42 each in cash.

Since the announcement, WFM share have traded on very large volume and almost continuously at prices above the deal.

What does this mean?

deal mechanics

If I’m a holder of WFM and the current deal stands, I’ll receive $42 a share from AMZN in, say, three months.  The value of that future $42 today is slightly less.  It’s $42 minus the interest I could earn on the money in the intervening three months.  Let’s say that amount is $0.25.

If I believe the deal is a sure thing, then, I should pay no more than $41.75 for an AMZN share today.  However, there’s always some risk that the deal will be called off.  The possibilities may be far-fetched–a government agency might forbid the acquisition, there might be something funky in the WFM financial statements…  This means the $41.75 is a ceiling, not a floor, on the stock price.  Typically, trading starts below the present value of the future payment and gradually approaches it as the deal gets closer, and as possible obstacles are cleared.  The amount below varies from deal to deal, depending on perceived risks.

Ithink WFM should probably be trading, at best, in the $41.25 – $41.50 range now, rather than at around $43.

the difference

The $1.50 difference represents a bet by the market that another, better, offer will emerge.  As a practical matter, most often these bets turn out to be correct.  Maybe it’s because the bettors have deep industry knowledge or maybe because they’re acting on information from/about another potential acquirer you and I are not privy to.

For me, this will be an interesting case to watch, since I can’t figure out who the other buyer might be.

 

 

Whole Foods (WFM) and Amazon (AMZN)

June 19, 2017 By in Amazon, supermarkets, Uncategorized, Whole Foods Tags: , , 1 Comment

I was a big proponent of WFM in its early days but haven’t owned it for a long time.

My quick look at the company’s financials this morning tells me it’s an odd duck among food distributors.  Successful distribution is all about low margins + rapid inventory turnover + shrewd working capital management + rising sales leading to strong profit growth.  WFM exhibits only one of these characteristics:  rapid inventory turnover.  The number I get from the annual report, which I find almost too good to believe, says that WFM’s annual sales are 30x its average inventory.  This compares with 10x for AMZN and 15x for Kroger (KR).

On the other hand, WFM’s operating margin is more than 50% higher than KR’s and nearly triple AMZN’s.  The excess of payables (what a firm owes to suppliers) over receivables (what customers owe the merchant)–and a key measure of operating strength–is about 1% of sales for WFM, while 3.6% for KR and about 15% for AMZN.  In addition, WFM is no longer growing–the main reason, I think, the company’s PE has been cut in half over the past couple of years from about 40x to 20x (pre-AMZN bid).

WFM’s problem isn’t simply that its margins are too high to induce people to buy more than they do of what the company has to offer.  Nor is it the assertion by some that WFM is very inefficient and should be making a higher margin than it actually does.

Rather, it’s that the current market situation is highly unstable, on several fronts:

–WFM-like offerings are increasingly available from less expensive chains like Trader Joe’s or even regular supermarkets

–having severely damaged the profits of incumbent grocers in the UK, deep food discounters from Germany–Aldi and Lidl–have both announced that their next target is the US.  Even if the two are unsuccessful, increased competition is bound to mean lower prices

–AMZN has decided that the time for online food delivery on a large scale in the US has come.  It’s also possible that it too is worried about the potential effect that Aldi and Lidl may have and has sped up its food distribution plans.

 

how will the takeover work out?

It’s hard to know.  WFM’s management hasn’t covered itself in glory over the past decade.  It needed to be bailed out from operating difficulties by Green Equity Investors in late 2008.  And it doesn’t seem to have responded well to increased competition since.  On the other hand, AMZN’s experiments in food delivery have had indifferent success so far. At the very least, though, AMZN brings a strong record in controlling distribution operations, expertise which WFM seems to me to need; WFM brings a brand name and the grocery equivalent of Amazon lockers.

My thoughts:  the one thing I’m confident of is that food prices will generally be lower for consumers in a couple of years than they are now.  I’d prefer to look for places where extra discretionary income can be spent than to try to play food directly.

 

UPS survey of online shopping

June 15, 2016 By in internet, Retail, Uncategorized Tags: , , , Leave a comment

A week ago, UPS released its fifth annual survey of online shopping.  The main results:

–for the first time ever, more than half of the purchases made by survey respondents are made online

–over three quarters use smartphones for their buys

–a third use social media sites to gather information; a quarter have bought things through social media sites

–a third start their shopping either at Amazon or eBay

—half of online shoppers take delivery at a physical store.  Almost half make additional purchases when they go to pick their items up

–60% of returns go through physical stores.  Again, consumers frequently buy additional items once they’re inside

–almost a third of purchases in a store are smartphone-guided, meaning buyers use their phones for product information, price comparison or download discount coupons

–35% of packages not sent to a store go to non-home locations, a trend that has been steadily rising recently

—pure physical-store shopping, meaning no online involvement in either search or purchasing, is down to 20% of all buys in the US.

 

No wonder traditional retailers, especially mall-based ones, are taking such a beating.  No wonder Amazon is aggressively beefing up its own shipping operations, while starting to tiptoe into opening physical stores (as a better way of processing returns?).

Amazon (AMZN) vs. Apple (AAPL)

February 2, 2016 By in cash flow, Uncategorized Tags: , , , , , , , 1 Comment

I changed radio channels from the morning news to Bloomberg Radio while I was in the car yesterday.  It was about 9am, so I figured I’d get some market news while avoiding the Today-like chitchat that begins on Bloomberg at 10am.

What I heard instead was an expression of disbelief about the relative valuation of AMZN and AAPL, with the former being inappropriately trading at 3x the price/free cash flow of the latter.   The senior talking head presented this as being so self-evidently true as to need no further discussion.

I’m not sure why this howler bothered me, but it it did.

Three points:

–Both companies were formed by visionary entrepreneurs who transformed the landscape of their industries.  However, Jeff Bezos is still innovating and AAPL hasn’t produced a big new product in the past five years.

AAPL is a high-end smartphone company.  Today, that’s a mature product that depends on replacement demand.  There are no new customers.  Network operators are trying to stretch out the replacement cycle as a way of lowering their costs.

In contrast, AMZN is all about web services, a business that’s in its infancy and growing like a weed.  And the world is increasingly shifting to online purchasing.

In other words, AAPL and AMZN are very different companies.

–The accounting principles AMZN uses are more conservative than AAPL’s.  What might appear on the AAPL income statement as $1 in profit might only be, say, $.75 on AMZN’s. That alone doesn’t explain why one should trade at 3x the other.  But the comparison is far from clean.  Dollars to donuts the talking head I heard had no idea.

–I don’t get why free cash flow generation is an appropriate metric to use in making the comparison in the first place.

Free cash flow is the money a firm generates from operations minus the capital it invests in building/maintaining the business (and, for me, minus any mandatory debt repayments, as well).  Free cash flow is the “extra” that can be used to pay dividends.  Good for income-oriented investors.  If it’s very large, free cash flow may even attract potential acquirers in related industries who have investment opportunities that are greater than their ability to fund.

At the same time, large free cash flow can signal that a business has no new investment opportunities.  So the large free cash flow may simply mean the company has gone ex growth.  That’s bad.  On the other hand, a firm may have little or no free cash flow because it has lots of new investment opportunities and huge capacity to grow.  A growth investor will pick the second over the first any day of the week.

Personally, I don’t have a strong opinion on AMZN vs. AAPL.  For years I’ve been bemused by the strength of AAPL shares despite the clear evidence that the smartphone market was nearing saturation.  I’ve also been surprised by how well AMZN shares have done.

My point is that there was a children-playing-with-matches aspect to the discussion I heard.  There was no recognition that AMZN and AAPL are very different kinds of companies and the comparison metric was, yes, a little more sophisticated than PE–but completely wrongly used.

Maybe CNBC isn’t so bad, after all.

 

big day for Amazon (AMZN)–why?

July 24, 2015 By in Amazon, cloud services, Current Market Thoughts, Industry Analysis, internet, operating leverage, Recent Market Action, software, Stock ideas, Technology Tags: , , , , , , Leave a comment

AMZN reported 2Q15 results after the close last night.  They were very good.

Sales were up 20% year-on-year; expenses rose by 17%, three percentage points less.  As a result, the company reported an operating profit of $464 million vs. a loss in the second period of 2014.

More than that, AMZN’s cloud services division, AWS, had revenue growth of 81% yoy and a quintupling of segment profits (basically operating profits less stock option expense) to $391 million.  AWS, broken out as a separate segment for the first time after 1Q15, remained a bit more than a third of the AMZN total.

 

AMZN posted an overall profit of $.19 a share for the quarter, vs. analysts’ expectations of a loss of $.13 a share and a deficit of $.27 per share in the year-ago quarter.

On the announcement, the stock immediately rose by 15% in aftermarket trading.

AMZN opened up by 20% this morning, before drifting down steadily during the day to close +9.8% in a market that was down just more than 1%.

 

Why the strong advance?

I have no good explanation, although I do have some ideas.

1. The obvious factor that changed overnight was the earnings announcement.

It contained a significant positive earnings surprise, one that makes it more likely that the company will earn, say, $1- a share in the current year. It makes the analyst consensus of $2.78 a share for 2016 more believable.   On the other hand, the stock was trading at $482 before the earnings report, or 173x the 2016 consensus.  Looking at the stock price another way, let’s say that at maturity for its businesses (whenever that may be), AMZN shares will be trading at 20x earnings.  To sustain the pre-earnings report price, that would imply a burst of rapid growth that shoots earnings up to around $24 a share.  That would be something like a doubling of earnings each year for the next five or six.

That’s already baked in the cake.  A buyer of the stock at this level must believe that $24 a share in eventual earnings is way too low.

I find it hard to believe that a $.32  per share earnings surprise during one quarter–when expectations were already sky-high=-would be enough to add 20%, or even 10%, to AMZN’s perceived market value.

2.  A second hypothesis…

What if investors are beginning to separate AMZN into two parts, AWS and everything else, and are doing a sum-of-the-parts evaluation.  To me, this sounds a little more plausible.  What would the numbers look like?

Let’s say that in 2016 AWS will comprise half of AMZN’s earnings and AMZN Retail the remainder.  To make the figures easier, let’s say each half earns $1.50 a share next year.

Let’s assume AMZN retail can grow in earnings at 20% a year for a long time, and that we’d be willing to pay 50x current results–a big number for a retail stock–for that future profit stream.  If so, AMZN Retail is worth $75.  To reach a sum-of-the-parts value of $482, AWS must therefore be worth about $400, or close to 270x its 2016 eps.  Ok, while I personally wouldn’t be willing to pay that much for AWS, I can see how someone else might.  However, I still don’t understand why confirmation that a holder at 270x earnings isn’t insane would cause the multiple to expand.  (Also, before I’d be comfortable valuing AWS as a separate company, I’d want to know more about how AMZN apportions revenues and costs among segments to ensure the published numbers don’t flatter AWS.  I’d also think long and hard about the possible effect of stock options.)

3.  The explanation for AMZN’s rocket ship ride that I’m leaning toward, however, is more technical.  Two factors may be involved.  At what Google Finance reports as 21+ million shares, today’s trading volume in AMZN was 7x normal.  The sharp opening spike suggests to me that algorithmic trading computers were at work reacting to the earnings report, not humans.  Humans, I think (?!?), would have a better sense of valuation.  I also suspect that the report and immediate upward move triggered a lot of short covering.

I’m partial to #3 because I think the whole reaction is a little  crazy.

Why is any of this important?  AMZN is a high-profile, large-cap stock with almost two decades of operating history.  There’s got to be a way to make money from the possibility that something like AMZN’s big move will occur with other similar names.