Friday, February 8, 2013

Amazon (AMZN) Part II

In part I, I demonstrated how little I know about Amazon, so now today, I’m going to start learning about the company.  I’ll start with taking a look at some of the key statistics available on Yahoo! Finance.

AMZN closed today, up $1.72 at 261.95.  Because the company showed a net loss last year, the TTM PE is not meaningful.  However, analysts project positive earnings for this year, so the forward PE is 71.88, and a 5 year expected PEG ratio of 4.20.  In my opinion, the PEG is pretty high, as is the forward PE ratio, both of which certainly indicate that this is not a value investment, which everybody already knows.  Like I said in the beginning, I don’t know a whole lot about AMZN, but that’s about to change.

Again, because AMZN is not profitable, the profitability ratios and effectiveness ratios aren’t terribly meaningful.  AMZN does have a current ratio of 1.12 so liquidity is okay.

The stock is up about 37% over the last 52 weeks, while the S&P 500 is up only about 12%.  Its beta is 0.88, which I actually expected to be higher.  Anyway, that’s enough of that.  I want to take a look at the annual report, and specifically the depreciation and shipping expenses I mentioned yesterday.

As far as depreciation goes, I don’t really see that it has much at all to do with land and buildings, like I was under the impression they were.  It’s mostly for “internal use software and equipment,” which constitute about 2/3 of the gross assets.  According to the 10-k, these items are depreciated straight-line over the useful lives of the assets, so I don’t see why anyone would expect depreciation to decline substantially any time soon, since that statement implies that the assets will need to be replaced once they have been depreciated, although that may not happen.  There is, though, a small note that says:

“In December 2012, we acquired our corporate headquarters for $1.2 billion consisting of land and 11 buildings that were previously accounted for as financing leases. The acquired building assets will be depreciated over their estimated useful lives of 40 years. We also acquired three city blocks of land for the expansion of our corporate headquarters for approximately $210 million.”

So, it looks as if there’s going to be significant capex (and depreciation) for the corporate headquarters in the future.  Also, at only $2.1B (I say only when compared to over $60B in sales) I have to say that I don’t buy the depreciation explanation.

Looking at shipping costs now, the first thing I noticed is that when a customer does pay for shipping, that’s added to revenue.  I don’t think it really should be, but what do I know?  Anyway, the breakdown on shipping costs shows a net expense of about $2.8B and as a percentage of sales that cost is declining.  So again, this doesn’t really appear to be a major problem area.

In fact, AMZN’s margins have shrunk a little, and scanning through the notes it appears that this is due to expanding payrolls, which isn’t surprising considering the increasing sales.  Of course, these expenses can’t keep growing at a faster rate than sales.  These appear to be the biggest drivers behind AMZN’s lower operating profit in 2012.

Some fairly substantial differences between 2011 and 2012 look more like non-operating expenses, like interest.  There was also a substantial increase in the provision for income taxes, as well as a substantial loss from AMZN’s investment in LivingSocial.

At this point, it looks like there really isn’t a single issue that can account for why AMZN is unprofitable, and I certainly haven't found any reason to think that anything is going to get any better.  So, over the next few days, I’ll put together a spreadsheet and dig a little deeper into the MD&A and notes to see if I can shed any more light on what’s going on with AMZN.

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