|  | | Price | 80.810 | | | Change | -2.610 | |
Research Wizard
Add to MSN Stock List
Message Board
|  | | Price | 24.930 | | | Change | -0.470 | |
Research Wizard
Add to MSN Stock List
Message Board
|  | | Price | 59.070 | | | Change | -0.810 | |
Research Wizard
Add to MSN Stock List
Message Board
Related Sites
Smartbargains.com
Blue Nile.com
Netflix.com
1-800-flowers.com
Street Patrol
Recent articles:
• Sip the suds, buy the stocks, 7/1/2004
• 4 tasty fast-food stocks to feast on now, 6/24/2004
• It's time to sell your home-builder stocks, 6/17/2004
More...
| | Street Patrol
3 great e-tailers click into place
As point-and-click makes a comeback, with healthy sales generating actual profits, there's still upside in shares of Netflix, Blue Nile and 1-800-Flowers.com.
By Robert Walberg
If you took last Friday off to get a head start on your July 4th celebration, you may have missed the news that SmartBargains filed an $80.5 million initial public offering with underwriters Merrill Lynch and SG Cowen. SmartBargains, which plans to trade under the symbol SBAR, is an Internet retailer that offers brand-name and high-quality products across 13 departments, ranging from home goods to apparel to electronics.
The company hopes to mirror the success of Blue Nile (NILE, news, msgs), which went public in May of this year. Blue Nile, an e-tailer of diamonds and jewelry, has jumped more than 75% from its original offering price. Thats right, boys and girls. The Internet retail space is making a comeback.
Sales soar, profits start coming in
Frankly, it was only a matter of time. As reported by Forrester Research, in a study sponsored by online trade group Shop.org, online sales surged to $114 billion in 2003, a 51% jump from the $76 billion recorded in 2002. More impressively, online sales accounted for more than 5% of all retail sales in the United States last year -- a huge number given the infancy of the industry. The study predicts continued strong growth this year, with online sales rising 27% to a record $144 billion.
Another significant finding of the study was that online companies are finally turning a profit. The big jump in sales, combined with tighter cost controls and improved margins, has resulted in profitability.
Blue Nile is a shining example; the jeweler is expected to post earnings of 52 cents per share in fiscal year 2004 and 73 cents in fiscal 2005. The companys profit margin of 19% is also among the highest in the e-tail industry.
The downside to such hypergrowth, if there is one, is that it brings with it very high expectations. And, on Wall Street, expectations often dictate a stocks near-term course more than actual performance.
Such was the case last week when Netflix (NFLX, news, msgs), an online movie rental subscription service, saw its stock drop 10% on news that its subscriber base in the second quarter grew by 82% year-over-year. The total was within the companys estimated range of between 1.9 and 2.1 million, but, apparently, some on the Street were disappointed in the actual number: 2,093,000 subscribers.
Positive energy but room for doubt
There is much more good news in this industry than bad. In the case of Netflix, even the bad news looks pretty good. Overall, online retail sales are growing at a brisk double-digit pace, margins are on the rise and profits are beginning to roll in. Toss in a couple of hot IPOs, and the energy emitted from this space is mostly positive.
But if we learned one thing from the Internet bubble, its that a good story doesnt necessarily make for a good investment. Drugstore.com (DSCM, news, msgs) was a good story, but it has been an awful investment. Over the last 52 weeks, when many e-tailing companies have flourished, shares of this online drugstore have plunged more than 50%.
Last month, the company announced that it would post a wider-than-expected second-quarter loss on lower than anticipated revenues. Drugstore.com also noted that it now expects a modest loss for fiscal year 2004, versus the modest gain it expected earlier. Aggressive pricing, free shipping and weaker-than-expected results from its recently acquired vision business are contributing to the disappointing numbers.
Another e-tailer that investors might want to shy away from near-term is Overstock.com (OSTK, news, msgs). Unlike Drugstore.com, theres been no earnings or sales warning. To the contrary, Overstock.com has delivered positive earnings surprises in each of the last two quarters, albeit by reporting narrower than expected losses.
However, in this case the valuations just dont support the stock price. Despite mediocre gross margins and limited earnings visibility -- the company expects to turn profitable in fiscal year 2005 -- the stock trades at 2.4 times trailing 12-month sales and a whopping 144 times estimated 2005 earnings of 26 cents. And its up more than 90% so far this year.
Big names no bargains, either
By comparison, Amazon.com (AMZN, news, msgs) seems cheap. This industry leader trades at 50 times and 36 times estimated fiscal year 2004 and 2005 earnings. Though high by traditional retail standards, when you consider that Amazon.com earnings are projected to grow by 69% this year and an additional 36% in 2005, the multiples arent so out of line. Revenue growth in the 20%-to-30% range is also much higher than most brick-and-mortar retailers are expected to deliver. As such, even the price/sales ratio of 3.7 seems reasonable. Reasonable, but no bargain, and its a bargain that were looking for.
By definition, then, we must also eliminate eBay (EBAY, news, msgs) from our buy list, as the stock trades at 24 times trailing 12-month sales and 77 times this years estimated earnings. Valuation alone compels us to look elsewhere, even though eBay remains a well-managed growth machine that dominates its niche. EBay needs to pullback to the low 80s or even the upper 70s before it would become an enticing investment.
Back to the 3 bargains
Basically, that leaves us three stocks. First, lets go back to Netflix. Though the stock sold off in reaction to its subscription numbers, its important to realize that the stock had jumped nearly 25% in the weeks leading up to the announcement. It looks like a classic case of buy the rumor and sell the fact; that merely creates opportunity for savvy investors. Theres been no change to the growth story here, even though competition is intensifying from companies such as Blockbuster (BBI, news, msgs) and Wal-Mart Stores (WMT, news, msgs). Netflix is not only adding subscribers at a rapid pace despite the competition, but it has passed through a healthy price increase.
Strong sales growth plus higher prices should enable the company to hit its profit targets of 49 cents per share in fiscal year 2004 and $1.35 in 2005. Based on such explosive growth, current valuations have plenty of room for expansion. And a sizable percentage of Netflixs outstanding stock is being shorted by bears. Consequently, if the company merely lives up to expectations, these investors will be forced to cover their positions, creating a powerful upward current to the stock.
Next up are Blue Nile and 1-800-Flowers.com (FLWS, news, msgs). The formers valuations, while not cheap, are justified by its growth potential, solid management team, excellent service and apparently loyal customer base. Operating expenses as a percentage of sales also continue to decline, lifting margins and bolstering the bottom-line. When compared with store-based retailers, Blue Niles operating advantages are obvious -- thus explaining the valuation disparity. The company is facing new competition from Amazon.com, but more on the low end than the high end, where Blue Nile gets most of its sales. Consequently, concerns over declining margins are exaggerated. Look for Blue Nile to surprise on the upside and make a run at $50-plus in the months to come.
Lastly, we turn to the one true bargain in the group -- if you can call trading at 27 times this years estimated EPS a bargain. 1-800-Flowers.com took a big hit in recent weeks in response to a weaker-than-expected sales forecast. The company forecast fiscal fourth-quarter sales at $161 million. Thats an improvement of 4% over the prior year but well below the Street view of $169 million. The result hasnt been pretty, with the stock dropping to within arms' reach of its 52-week low of $7.48. The good news is that with the bad news out, the stock is trading at less than 1.0 times trailing sales. Earnings are also expected to jump by 69% this year and another 49% in 2005. Thats pretty nice growth for the price. So, look for this currently out-of-favor stock to blossom over the next 12 months.
More than 50% of Americans bought something online last year, and online sales are expected to represent more than 6.5% of all retail sales in 2004. Now might be a good time to buy stock in a few of the surviving e-tailers that are finally enjoying the spoils.
At the time of publication, Robert Walberg owned none of the securities mentioned in this article.
|
