Two of the Rule Breaker's companies reported second quarter earnings this afternoon -- Amazon and Amgen. While Amazon's earnings were a mixed bag with lower than expected sales coupled with a better cost structure, Amgen didn't report any surprises. Both companies will remain in the Rule Breaker Portfolio for the foreseeable future.
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Before the earnings were released, Amazon had a fairly tough day as the stock traded down almost 10% at one point. There were several events weighing on the company's shares before the release:
Hit number one: Amazon loses its President
Yesterday, it was announced that the company's president and #2 man behind Jeff Bezos, Joseph Galli, was leaving Amazon to take the top post at B2B company VerticalNet (Nasdaq: VERT). Though personal reasons were cited for Galli's change in employers, any sort of high-level executive departure almost always raises suspicion about the health of the company departed. We published one Foolish take on the departure today.
Hit number two: Analyst downgrades the stock before earnings released
In a report subtitled "Throwing in the Towel on Amazon," Lehman Brothers analyst Holly Becker downgraded Amazon's stock from a "buy" to a "neutral" this morning. Though we don't normally pay much attention to analyst upgrades and downgrades here at the Fool, this one was of particular note because of its timing.
"Throwing in the towel" is strong language, especially right before the company comes out with its latest numbers. It certainly sparks doubt in the minds of investors and analysts since we are left to wonder if Holly doesn't know something that we don't. This is especially true since the report really didn't have any new factual research or changes in forecasts inside it. Either way, the downgrade hurt the stock today.
Hit number three: Site goes down for a half hour
Several news outlets reported that Amazon's site went down for a half hour near lunchtime on the East coast. An internal computer error was cited, and everything appears to be back up and running right now. The last thing Amazon needs during this time of great trials is further worry about site security and durability.
And now the star of the show... Amazon's earnings!
Amazon's earnings were a mixed bag. On the poor side, the company reported revenue of $577.8 million, which was barely above the $573.9 million it booked in the first quarter. My estimate published in Motley Fool Research called for $700 million in sales, and most other analysts were calling for revenue in the $600 to $650 million range. The fact that the company undershot these figures quite significantly and did not grow as much as expected is not exactly welcome news.
On the good side, the company's cost structure was also much lighter than expected. Even though Amazon totally missed my revenue estimate, it still nailed my bottom line expectations. The company reported a pro-forma net loss of $155.7 million versus our published estimate of $155.5 million.
This means that Amazon's margins improved significantly more than we would have expected at these sales levels. Gross margins matched our estimates of 23.5% (versus 22.3% in the first quarter), but the real improvement came in the overhead costs. The company's selling, technology, general and administrative expenses rang in at a cumulative $225.4 million, far less than our $255 million estimate. The adjusted net margin came in at negative 20.0%, below the 16.5% we expected. But then again, we would have expected much worse losses to accompany the top-line softness.
The bottom line with today's numbers is slight disappointment with the weakness in the company's revenues, but happiness that the company was able to keep its costs in check. Growing sales faster than expenses is a critical step if Amazon is to someday attain real profits.
We have no doubt that online sales as a whole will continue to increase in years ahead, and Amazon is the best positioned among its peers to take advantage of the growth of consumer e-commerce. One quarter coinciding with the typical online summer slowdown is not one with which to declare Amazon a success or a failure. Its biggest test of the year, the holiday season, lies just ahead. We still plan on holding the shares in this portfolio through many more holiday seasons to come.
We'll have more to say in this space in the days ahead, and keep a look out for an updated Amazon report from Motley Fool Research.
A word from Jeff about Amgen
Rule Breaker Amgen (Nasdaq: AMGN) didn't report any surprises when it announced $914 million in second-quarter revenue, up 11% from last year, and $0.28 in earnings per share, up 12%. Sales of Epogen gained 15% from last year to $493 million, while Neupogen sales rose 2% to $310 million. This was better than last quarter's decline in Neupogen sales, but below the mid-single digit growth in sales expected for the year's entirety.
Kevin Sharer, Amgen's CEO, said, "We remain focused on preparing to launch our four late-stage product candidates, NESP, IL-1ra, abarelix-depot-M and SD/01, over the next few years...." Amgen's drug pipeline status is always updated in Motley Fool Research reports on Amgen, and you can find information on the pipeline's drugs at Amgen's site. Clearly, the company's long-term growth is largely reliant upon the pipeline.
Amgen's second quarter results were good enough to keep us happy as long-term investors. Its volatile stock will probably continue to be volatile, but when looking back on it years from now, we're hoping that the volatility evolves into a gradual upward-sloping chart, much like the chart is already doing when you look back now three years. At $69 per share, Amgen trades at 63 times this year's earnings estimate and 52 times year 2001 estimates. Motley Fool Research writer Zeke Ashton wrote that he prefers to wait and hope for a price in the low $50s to purchase Amgen. We're holding our shares for, we hope, at least another decade -- really, as long as merited. Now...
Your Turn!
Is our little ol' Rule Breaker Port downright, shoe-slappin' crazy to keep holding Amazon and Amgen? Voice your opinion on the Rule Breaker companies board. And then Fool on!
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