Bulking Up: Not for nothing is it called Amazon

Q. What do you do as a consumer goods stock when the 800-pound gorilla of online shopping gets into clothing retailing and the private labeling of food?
A. You try to calm yourself and invoke Bob Dylan from All Along the Watchtower: ‘‘ ‘There must be some kind of way outta here’ Said the joker to the thief.”

It’s very unlikely that consumer goods stock Amazon.com, Inc. (NASDAQ—AMZN) cares for the competition – in fact it’s unlikely if Amazon even thinks about the competition when it decides to launch a new product or service. And with its apparently infallible and pristine business model all Amazon seems to think about is itself. Pity the competition. Or, who cares?

Barely one month ago, Amazon announced its intention to sell whole-bean and ground coffee on its web site under its new Happy Belly label. Competition? As we said, who cares? The giant U.S. blue chip stock has also rolled out Mama Bear baby food in two flavours and is planning four brands of private label foods, diapers and cleaning supplies. So look out Starbucks, Gerber, et al.

About a year ago the company became a clothing retailer, and is now poised to become the largest retailer of clothing in the United States. It’s estimated that Amazon.com’s share of the American market will jump from seven per cent this year to 19 per cent in 2020. Is it any wonder that fellow consumer stock Gap Inc. (NYSE—GPS) has fallen from grace?

The Gap’s prices build in the costs of a huge brick-and- mortar store network. Amazon’s much lower costs enable it to undercut The Gap’s prices and those of other traditional retailers. In fiscal 2017, which began this February, The Gap is now expected to earn $1.86 a share, down from $2.41 a share, or 23 per cent, from last year.

If you can’t beat them, buy them

There’s an old saying “If you can’t beat them, join them.” This would mean wrenching changes for The Gap and other traditional retailers in the consumer goods industry. But for individual investors, it’s much easier. You can modify the saying so it goes like this, “If you can’t beat them, buy them.” Amazon’s earnings are growing quickly and should continue to do so for many years.

Amazon generates 21 per cent of its sales from books, music and videos. It makes seven per cent from the sales of electronic products. “Other,” (including clothes) accounts for eight per cent. International sales account for one-third o the total. It also makes a fifth of its revenue from third-party sellers.

The company is expected to earn $5.37 per share in 2016. That would be up sharply from $1.25 a share last year. Next year, the company’s earnings are expected to increase by almost 83 per cent to $9.82 per share.

Amazon is best suited to investors who want a growth stock and need no dividends. Indeed, the company has never paid a dividend.

On January 1, Amazon held cash and short-term investments of $19.808 billion. This exceeded total debt of $8.235 billion. This gives the company the flexibility to invest in its business, complete acquisitions or reward you.

 

The MoneyLetter, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846