Books, Boeing and Bumping Heads : Amazon.com Is Risky Play, but What of Plane Builder?
The Times today introduces Stock Exchange, a lively review of individual stocks by staff writers James Peltz and Michael Hiltzik, who between them have 30 years’ experience analyzing the securities markets.
Jim: Mike, up first is Amazon.com. Amid the hype over Internet stocks, it’s soared to a ridiculously high price, about $100 from $12 a year ago, even though no one has a clue about the company’s potential. And because there aren’t a lot of shares floating around, it often moves $10 or $15 in a single day. I’d ignore the stock and sleep at night.
Mike: Right. Amazon of course is the world’s biggest--well, let’s give credit where credit is due--it’s the galaxy’s biggest online retailer of books. It’s got a Web site instead of bricks and mortar. In this year’s first quarter it sold $87.5 million of books and lost $9.3 million. In fact, Amazon doesn’t plan to turn a profit until 2001 at the earliest. So, hey, why be surprised that the stock has gained 650% in the last year? And now it’s got a market capitalization bigger than its two nearest profitable competitors combined--Barnes & Noble and Borders.
Jim: Which is the perfect time to bring up the “greater fool” theory of investing--namely that it doesn’t matter what you think a stock is worth, as long as there’s a greater fool out there . . . .
Mike: . . . to take it off your hands. And you know what happens when you run out of fools.
Jim: Exactly. And I’m sick of hearing Wall Street types argue that you can justify these stocks’ high prices on the grounds that the Internet demands new ways of thinking about value.
Mike: That’s a classic dodge. In fact, now that “Seinfeld” is off the air, the funniest spectacle around is watching Wall Street analysts twist themselves into knots trying to rationalize the valuations of companies like Amazon.
Jim: And to recommend the stocks when they know better.
Mike: I wouldn’t get within 100 miles of this stock. Internet stocks are volatile because no one has any benchmark by which to judge the companies’ business plans. So they can be $50 today and $90 tomorrow--and $20 the day after that. Exciting, yes, but nobody would mistake it for responsible investing.
Jim: I’m sure some day-traders have made a killing with this stock’s gyrations. But most of us can’t sit around our PCs buying Amazon and selling it an hour later. We have lives. And Amazon isn’t the next Microsoft. So if you own Amazon and you’ve made a few bucks, don’t be greedy. Get out.
Mike: I’m amused by even the common rationalizations we’ve heard for why Amazon makes investment sense, even though it’s got a P/E multiple of infinity. For instance, you’ll hear analysts say that in this fast-moving retail setting, Amazon’s got the “first mover” advantage. It’s the first bookseller online. It’s got brand-name recognition. It’s got an account base of a couple of million people who have already bought books, out of a potential market of 60 million Internet users.
Jim: Isn’t that worth something? Especially if Amazon--which has already moved into music as well--starts selling other things online?
Mike: Not on the Internet, it isn’t. That argument has everything upside-down. It’s based on the assumption that technology is so expensive that Amazon has left its competitors permanently in the dust. In reality, technology is cheap--especially compared with the chores of finding store locations, getting leases, redecorating, maintaining inventory and hiring 100 part-time workers.
Jim: Not to mention maintaining their coffee bars.
Mike: Just for laughs, I pulled up some figures on Barnes & Noble, which is the nation’s biggest bookseller and Amazon’s archrival. It’s taken Barnes & Noble eight years to build up its network of nearly 500 “superstores.” But it had its Web site up and running in less than a year, and this year that online service will produce $100 million in sales.
Jim: I’m beginning to think Barnes & Noble and Borders are the stocks to buy.
Mike: The problem with Internet stocks is that the barriers to entry are very low, which means Amazon will have lots of competitors in no time. And since it’s not making money now, it’s going to be on a treadmill--cutting costs and spending more on advertising to fight off its rivals.
Jim: And isn’t it true that the book market is basically flat?
Mike: Yes--and a commodity market to boot. Amazon is a fabulous company, and I’ve bought quite a few books from them and never had a bad experience. But now I can get the same service from Barnes & Noble, and soon enough there will be two or three others doing the same thing. And all I’ll care about is who will sell me the book for the cheapest price.
Know what else? One of these days we’re going to wake up to discover some survey showing that--whoops--consumer Internet growth has suddenly slacked off.
Jim: Amazon.com is a great concept. The fact that Barnes & Noble and Borders rushed to get their own sites online illustrates that. But the argument that Internet stocks are in a brave new world where the old rules about value no longer apply is, well, a lot of yahooey. Just ask Iomega.
Mike: Our second stock is Boeing, which is about as different from Amazon.com as you can get, even though both are headquartered in the same city, Seattle. We’re going from chips and mouse-clicks to metal-bending and global reach.
Jim: Boeing, of course, is by far the world’s largest maker of jetliners. It’s also one of the nation’s biggest exporters, which makes it sort of like the State Department of American industry.
Mike: That means Asia is one of it’s prime markets, doesn’t it?
Jim: We’ll get to that. The company’s had a rough time of it lately. Boeing was flying sky-high 12 months ago, with more orders than it could handle. It was buying McDonnell Douglas, which meant essentially taking out the world’s No. 3 airplane builder. The stock hit 60 bucks. Then suddenly everything went wrong.
Mike: And lately its stock has been bumping along at the bottom of its 52-week range like a 747 taxiing on six flat tires. I’d pass.
Jim: Not me. I’d buy this stock in a New York minute.
Jim: Hold on. Yes, a lot of people are surprised that a company thought to be as well-run as Boeing--which, by the way, is a component of the Dow Jones industrial average--could screw up this badly. As they were merging with McDonnell Douglas they were also ramping up their new version of their 737, the most popular airplane in the world, and grappling with this flood of orders coming in. Suddenly, they had production bottlenecks that cost them big money.
Mike: Their investors lost big money, too, Jim.
Jim: OK, so it seemed as though the news never got better, and the stock kept sinking. Now it’s in the high 40s, which gives it a P/E of only about 15 times next year’s expected earnings. That’s why I’d buy it. Even factoring in the problems in Asia, this stock is dirt cheap.
Mike: There’s a reason the stock is so cheap. And I notice you haven’t mentioned that Boeing’s profit margins are running about half their level of a year earlier.
Jim: Listen, unless you’re a short-seller, isn’t the idea to buy low and sell high? You’re looking at a blue-chip company that’s temporarily down on its luck, but I’m convinced it will soon fix its production snags, get its margins back up and start flying right again.
Mike: I’m skeptical. The story on Boeing is that it’s expected to work through its production problems in time before the booming market for airplanes flies out the window.
Jim: That’s right.
Mike: But that’s a big if. The Asia problems are killing the Asian airlines, which have grown to become Boeing’s biggest customers. What happens as more of these airlines cut back their fleets or run out of money to pay their leases? Not only will they cancel orders, they’ll put a lot of finished jets back into the market. There’s a big risk of a worldwide aircraft glut.
And Jim, don’t forget about the price war Boeing’s been waging with the Avis of airplanes, No. 2 builder Airbus Industrie.
Jim: But that’s been priced into this stock. Look, there’s no question Asia’s a problem, and it’s going to weigh heavy on the stock for a while. But the overall aircraft market will stay relatively strong, and Boeing’s a classic pick for the long-term investor.
Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at email@example.com; James Peltz can be reached at firstname.lastname@example.org. Or write either at Business Editorial, Times Mirror Square, Los Angeles, CA 90053.
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