Saturday, 24 October 2015

52 week lows October 23rd, Walmart vs. Amazon (again)

Out of my 20 candidates for initial screening hitting 52 week lows on Friday, I had 11 retail companies on the list.

At the same time, Amazon made a new all time historical high on Friday on the back of a "surprise" profit.

Here's an excerpt from one of my favourite "objective" news sources, Yahoo Finance:

"Start with Amazon. The world's biggest online store used to struggle convincing Wall Street that it had a real business model. But the past few quarters have been different since Jeff Bezos decided to reveal separately the results at his cloud services unit, Amazon Web Services. Overall, Amazon reported $25.4 billion of revenue, ahead of $24.9 billion expected by analysts, and a surprise profit of 17 cents a share, versus a loss of 13 cents expected by analysts. And it's AWS that's driving the train. Its sales were up 78% to over $2.1 billion with an operating profit of $521 million. There aren't many parts of the tech market that are growing at 78%, but the cloud is and Amazon is clearly in the lead."

Here's the math:  AWS had a $521M in operating profit (I wonder if this includes or excludes stock based comp) on $2.1B of sales = 25% EBIT / sales.

Looking at the last 5 years of results, EBIT (as reported) has been all over the map.  $1.4B in 2010, $862M in 2011, $676M in 2012, $745M in 2013, $178M in 2014, and $1.7B in 2015 (ttm).

For the quarter, total EBIT as reported was only $406M, so in order for AWS to have operating profit of $521M, the other non-cloud segments or corporate allocations must be eating up profit.

The overall net profit for the quarter ended up being $79M. so something magical has obviously happened to get from $406M in consolidated EBIT to an overall profit of $79M.

Whatever I think is fiddelsticks and is totally irrelevant relative to what the majority thinks, and the majority applauded a $.17 per share profit.

In the meantime, these are the bricks and mortar retail companies making new 52 week lows on Friday from my 52 week low list, complete with pretax cap rate computation.

For sh-- and giggles, I've added Amazon to the bottom of my list so we can all make our own comparisons.

SymbolClose52 week high% change from 52 week high52 week lowMktcapEPSP/EEBIT (pretax)EVNet cash (Mkt Cap - EV)PT Cap Rate
BKE34.0056.13-39.43%33.511,6913.28102491,51018116.5%
DSW24.9239.58-37.04%24.112,2651.85132611,92034513.6%
DECK55.7799.88-44.16%55.561,9544.27132111,73022412.2%
DKS42.0260.33-30.35%41.835,1643.01145814,86030412.0%
KSS44.0679.60-44.65%43.458,8343.82121,66212,560-3,72613.2%
M47.9773.61-34.83%47.6816,5094.06122,63122,300-5,79111.8%
JWN64.9883.16-21.86%64.6112,8963.79171,32314,950-2,0548.8%
VSI31.5749.04-35.62%30.709311.891795946-1510.0%
WMT58.3190.97-35.90%58.22188,8304.781225,693233,000-44,17011.0%
HIBB33.6155.74-39.70%32.548012.83121137168515.8%
URBN27.4447.25-41.93%27.233,4011.72163573,25015111.0%
AMZN599.03619.45-3.30%284.00280,1720.698681,715274,4205,7520.6%


Now, I may be missing a huge point here.  R&D for the rolling ttm period ended Sep 15 was $11.6B.  If I add 100% of R&D spend back (on the presumption that 100% of R&D should be capitalized because, well, it's a virtual certainty that 100% of R&D spending is going to translate into future cash flows), EBIT increases to $13.3B, and pretax cap rate increase to 4.8%.

If I use the same logic with Walmart, there's no R&D but there is SG&A of $94.8B, and included in SG&A is restructuring spend of say, $2B to $3B.  I'm going to add back $2.5B of SG&A (2.6%, not 100%) to EBIT of $26B and increase normalized EBIT to $28.5B.  My pretax cap rate increases to 12.2%.  3 x that of Amazon's.

Also included in the list: Dick's Sporting Goods, Hibbett Sports, Kohl's, Macy's, and Nordstrom.

I'm not advocating any of these individual companies as buyable.  But I have a theory on all of this that ties into the "institutional imperative".

I believe that the trade amongst institutional momentum participants is buy Amazon, short bricks and mortar retail, and lever up to do it.  Why else would so many retail names all make 52 week lows on the same day?

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