Thursday, April 29, 1999
DJIA 10866.36 +20.91 (+0.19%) S&P 500 1344.07 -6.84 (-0.51%) Nasdaq 2507.06 -43.31 (-1.70%) Russell 2000 431.00 -2.53 (-0.58%) 30-Year Bond 95 30/32 +24/32 5.53 Yield

An Investment Opinion
by Louis Corrigan

Hello? Amazon Wants to Lose Money

Long-term investors have to giggle at Amazon.com's (Nasdaq: AMZN) management. The folks running this e-commerce titan are tough-minded investors with a seemingly Buffett-like time horizon: forever. Yet with Amazon down $24 3/4 to $168 3/4 on warnings of deeper losses to come, the question is whether CEO Jeff Bezos and CFO Joy Covey can continue to convince other investors to buy into their plans.

This sell-off has little to do with Q1 results, which were terrific. Revenues shot up to $294 million, shy of whispered hopes for $300 million but a nifty 16% increase from the $253 million recorded in the seasonally strong Q4 and a 236% gain from Q1 FY98. Excluding acquisition charges, Amazon sustained a $36 million loss, or $0.23 a share, worse than a $10 million loss a year ago, but better than the $0.29 per share loss analysts had expected.

The company added 2.2 million new customers in the quarter, more than the 1.7 million gained in Q4. The cumulative total is now a stunning 8.4 million. Amazon spent $61 million in marketing in the quarter, triple the year-ago level and up from $49 million in Q4. Customer loyalty remained strong, with 66% of orders coming from repeat buyers. Gross margins of 22.1% were flat versus a year ago, but up from 21.1% in Q4. The cash flow dynamics remained awesome, as Amazon ended the quarter with just 18 days of inventories and 2 days of accounts receivable, but 53 days accounts payable. This negative 33 day cash conversion cycle means suppliers continue to fund Amazon's working capital. Of course, after its convertible debt offering, the company is sitting on $1.4 billion in cash.

Amazon's challenge, though, is embodied by this funny quote from Volpe Brown Whelan analyst Derek Brown. "On the one hand, I would like to see a near-term focus on profitability," he told TheStreet.com. "On the other hand... there's a belief that this company is building the retailing franchise of the next century."

Dude, these hands don't belong on the same body! Amazon would knock itself out of the running for world domination if it made money today. If you listen to Covey, you've got to figure Amazon really really really would prefer not to turn a net profit until well into the new millennium -- unless other investors prove just too skeptical to keep Amazon's stock priced as an acquisition currency. If you trust this management team (and you should), bigger losses are arguably good news. They mean management has found more ways to grow the company.

"The opportunity to build a lasting global franchise, this quickly and with so little capital, is one that we cannot pass up," Covey explained in last night's conference call. "A lower investment level would require us to make choices that we feel are contrary to the interests of long-term oriented investors and to our customers. We'd have to give up expansion opportunities; underinvest in our brands, and in new initiatives like auctions; build new capacity in a reactive way that reduced service levels to our customers and end up with a less efficient long-term infrastructure. Or, we'd have to forego the focus and investment in systems and processes that are critical to managing our increasingly large and complex business. None of these choices seems rational to us."

So Amazon plans to be "in investment mode for some time," Covey said, and "it is likely that the greater our success at expanding our business, the greater our investments will be." The company would be investing even more aggressively today were it not for what Bezos calls "executive bandwidth constraint," or the need for more top-notch executive talent. (With Covey moving to chief strategist, the company needs a new CFO and a COO).

What's spooked some investors is that future losses will be "substantially" higher than previous estimates. Operating losses in the future quarters of 1999 could be at least 2.5 times the actual Q1 loss. Covey added that "guidance will be a moving target." Moreover, with no product launches this quarter and the new customers looking a little more mainstream (they don't buy as much as the early adopters), Q2 sales should be below the historical trend.

Some analysts, including Morgan Stanley's influential Mary Meeker, are keeping the faith. "Now is the time for true believers to stand up and be counted," said Credit Suisse First Boston analyst Lise Buyer in a research report this morning reiterating her "Buy" recommendation. I agree. You can believe it or not, but the Amazon story hasn't changed at all.


Pharmaceutical contract research organization (CRO) Parexel International Corp. (Nasdaq: PRXL) jumped $2 5/8 to $21 15/16 after agreeing to be acquired by larger rival Covance (NYSE: CVD) in a stock swap valued at about $827 million. Covance, which will be renamed Covance Parexel Inc. and expects the deal to be neutral to earnings in 2000 and accretive thereafter, lost $6 15/16 to $20 9/16.

Computer Reseller News and Electronic Engineering Times publisher CMP Media (Nasdaq: CMPX) moved ahead $4 17/32 to $38 13/32 after British publisher, market research company, and PR Newswire operator United News & Media (Nasdaq: UNEWY) agreed to acquire the company for $39 per share, or $920 million in cash (excluding cash on hand). United News & Media rose $1 to $23 1/4.

Wireless local area networking (LAN) technologies company Proxim Inc. (Nasdaq: PROX) was boosted $2 7/8 to $35 1/4 after chipmaker Intel (Nasdaq: INTC) said it will work with the company to develop wireless home networking products. Intel has also purchased 320,000 Proxim shares, which works out to a 2.9% stake.

Electronic manufacturing services (EMS) firm SCI Systems (NYSE: SCI) moved up $4 1/8 to $39 1/8 after posting fiscal Q1 EPS of $0.48, which was above the downwardly revised $0.45 expected by analysts surveyed by Zacks. The results seemed to quell some recent worries about the company's questionable business direction, as evidenced by at least five upgrades from brokerages this morning.

Big Bertha golf clubs maker Callaway Golf Co. (NYSE: ELY) impressed the gallery with a $3/4 rise to $15 11/16 this morning after posting Q1 EPS of $0.18, up from $0.16 a year ago and ahead of the Zacks mean estimate of $0.12. However, the company said it is still cautious about sales this year despite its strong first quarter results. Jefferies & Co. and A.G. Edwards both raised their ratings on the firm today.

Cable set-top box maker Scientific-Atlanta (NYSE: SFA) gained $2 1/4 to $30 3/4 after reporting fiscal Q3 EPS of $0.25 (excluding gains) versus $0.22 a year ago, topping the First Call mean estimate of $0.19. Revenues increased 11% year-over-year to $320 million. CIBC Oppenheimer raised its opinion of the company to "buy" from "hold."

Composite-based materials and products maker Advanced Technical Products (Nasdaq: ATPX) climbed $3 1/2 to $13 1/2 after saying it has signed a memorandum of agreement with an unspecified third party regarding the sale of the company at a price of $13 per share in cash, which does not include an additional $3 per share payment contingent on earnings this year.

Restaurant operator IHOP Inc. (Nasdaq: IHOP) leapt $5 1/2 to $49 5/16 after reporting Q1 EPS of $0.65 compared to $0.47 a year ago. The company, which was recently profiled in the Fool's Stocks for Mom feature, also set a two-for-one stock split.

Truck maker Navistar (NYSE: NAV) rolled $4 3/16 higher to $53 3/16 thanks to a Goldman Sachs upgrade to "trading buy" from "market outperform."

Earnings Movers

Applebee's International
(Nasdaq: APPB) up $3 to $26 13/16; Q1 EPS: $0.44 (excluding charges) vs. $0.39 a year ago; estimate: $0.42

Geon Co. (NYSE: GON) up $2 9/16 to $30 11/16; Q1 EPS: $0.50 (excluding charges) vs. $0.25 last year; estimate: $0.40

Hollywood Entertainment (Nasdaq: HLYW) up $1 1/2 to $25 1/2; Q1 EPS: $0.31 (excluding Reel.com results and charges) vs. $0.21 last year; estimate: $0.29

LCA-Vision (Nasdaq: LCAV) up $1 1/8 to $7 5/8; Q1 EPS: $0.04 vs. loss of $0.04 last year; estimate: $0.02

Oxford Health Plans (Nasdaq: OXHP) up $7/8 to $21 5/8; Q1 EPS: loss of $0.06 (excluding gain) vs. loss of $0.37 last year; estimate: loss of $0.35

Service Corp. International (NYSE: SRV) up $1 3/8 to $20 7/8; Q1 EPS: $0.36 (excluding charges) vs. $0.42 last year; estimate: $0.35


Semiconductor assembly equipment firm Kulicke & Soffa (Nasdaq: KLIC) softened $4 to $24 1/8 following news of a fiscal Q2 loss $0.06 per share narrower than projected, at a loss of $0.32 per share before one-time items. Chairman and CEO C. Scott Kulicke said a recent influx of orders "should lead to a return to profitability later this year." Analysts are looking for black ink in fiscal Q4 at the earliest.

Traffic-control systems, industrial refrigeration equipment, and commercial cooling and cogeneration systems company Thermo Power Corp. (AMEX: THP) lost $15/16 to $11 1/4 following the news that it is considering a $12 per share cash buyout offer from 78% owner Thermo Electron Corp. (NYSE: TMO). The price is a slight discount to yesterday's $12 3/16 close.

Document management software company Mobius Management Systems (Nasdaq: MOBI), downgraded to "market outperformer" from Goldman, Sachs & Co.'s "recommended list," lost $4 3/16 to $9 13/16. Last night, the company reported fiscal Q3 EPS of $0.07, better than last year's nickel profit but a penny below First Call's four-analyst consensus estimate.

Electronic hardware and software design tools maker Mentor Graphics (Nasdaq: MENT) fell prey to an identical downgrade from Goldman this morning. The company lost $1 15/16 to $12 9/16 after reporting Q1 EPS of $0.07 before charges, up from last year's breakeven result and $0.02 better than market projections. "We remain bullish on the state of our business,'' said CFO and COO Gregory Hinckley.

Airfoil and turbine castings maker Precision Castparts Corp. (NYSE: PCP) lost $4 5/16 to $42 13/16 after Chairman and CEO William McCormick said, "the downturn in the aerospace cycle, the overall weakness in the petroleum-related industries, and the impact of the not-yet-recovered Asian economy will all exert downward pressure on the company's performance, particularly in the first half of the year." Precision Castparts reported fiscal Q4 EPS of $1.14, up from $0.99 last year and a penny ahead of estimates.

Needle-free drug injection systems company Medi-Ject Corp. (Nasdaq: MEDJ) lost $1 7/16 to $4 15/16, giving back some of yesterday's $5 1/16 leap on news of FDA approval for over-the-counter sale of its Choice no-needle insulin injector.

Digital imaging and printing plate technologies firm Presstek (Nasdaq: PRST), which announced a Q1 loss of $0.10 per share, down from EPS of $0.07 last year, shed $1 5/8 to $7 15/16. The company said Heidelberger Druckmaschinen made an order for its Quickmaster DI imaging kits, shipments of which are expected to begin in Q4.

X-ray systems marketer Hologic Inc. (Nasdaq: HOLX) gave up $1 1/4 to $7 5/8 after reporting a fiscal Q2 loss of $0.08 per share, down from last year's $0.20 per share profit and well off First Call's $0.19 consensus estimate of four analysts. Latin American sales and U.S. densitometry revenues were disappointing. Hologic also said it agreed to buy digital X-ray systems company Direct Radiography Corp. for about $30 million in cash and stock.

Earnings Movers

Actel Corp. (Nasdaq: ACTL) down $6 3/8 to $12 3/4; Q1 EPS: $0.19 vs. $0.17 last year; estimate: $0.20

Cooper Cameron Corp. (NYSE: CAM) down $7/8 to $36 1/8; Q1 EPS: $0.20 vs. $0.60 last year; estimate: $0.28

DSET Corp. (Nasdaq: DSET) down $1 13/16 to $12 7/16; Q1 EPS: $0.05 vs. $0.03 last year; estimate: $0.05

Global DirectMail Corp. (NYSE: GML) down $2 1/8 to $16; Q1 EPS: $0.30 vs. $0.34 last year; estimate: $0.30

Pharmacia & Upjohn (NYSE: PNU) down $1 3/8 to $55 15/16; Q1 EPS: $0.42 vs. $0.36 last year; estimate: $0.42

Tower Semiconductor Ltd. (Nasdaq: TSEMF) down $3/4 to $7; Q1 EPS: loss of $0.50 vs. loss of $0.11 last year; estimate: loss of $0.40

Unilever (NYSE: UN) down $1 3/8 to $68 3/8; Q1 EPS: $0.60 vs. $0.61 last year; estimate: $0.59

WellPoint Health Networks (NYSE: WLP) down $3 1/2 to $71 1/2; Q1 EPS: $1.04 vs. $0.95 last year; estimate: $1.04


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