October 27, 2000

Amazon remains a credible biz model

Each week, the Daily Journal of Commerce compiles analysts recommendations on local stocks.

Stock prices reflect Thursday's close. The Dow gained 115 points to 10,442, while the Nasdaq added 26.64 to 3,256. The S&P 500 also gained 5.7 points to 1,370.

Analysts use the following guidelines for their recommendations:

• Strong buy, buy or highest
  
• Buy/accumulate, mild buy, outperform, attractive or above average
  
• Neutral, hold, reasonably priced, average or market performer
  
• Mild sell, unattractive, below average or underperform
  
• Sell, lowest

52-week high: $113
52-week low: $19.37

Buy. At a time when investors are punishing unprofitable dot-coms, Amazon "has withered like a week-old bushel of roses," in the words of Dain Rauscher's George F. Sutton. But that skepticism, said Sutton, creates a buying opportunity and "a more optimistic outlook should create a nice near-term move in the stock."

Amazon this week reported third quarter results that exceeded analysts' expectations, as sales rose 79 percent. Revenues were $638 million, compared to $356 million the same quarter last year. Analysts had expected about $600 million for the quarter. Amazon was expected to lose 33 cents a share, but lost 25 cents, with a pro forma operating loss of $68 million. The customer count for the third quarter grew by 13 percent. For the fourth quarter, Amazon said it expected sales to reach $950 billion to $1.05 billion, and $4 billion for 2001.

With new categories for shoppers and higher average purchases, as well as a growing customer base, "the possibility for a really big fourth quarter clearly exists," he said. "What is most impressive, in our opinion, are the logical points of leverage, including a rapidly growing set of businesses nearly 80 percent (year-over-year) sold at much higher gross margin levels, with lower year-over-year capital expenditures. Many of the product offerings didn't exist this time last year, and some of the categories, such as toys and consumer electronics, have been vastly improved."

With $2 billion in corporate debt and $900 million in cash and cash equivalents, some analysts have said Amazon's credit rating has been hurt by its slowness in turning a profit. That could place additional pressure on Amazon to produce good numbers in the crucial fourth quarter.

"When the market leader is getting creamed virtually every day, it is hard to be enthusiastic about any e-commerce model," Sutton conceded. "With a very nice quarter posted and an outlook for growth, the response from investors may well be to look at those remaining credible e-commerce models, some of which have more clear paths to profitability. What is good for Amazon is good for the group." He set a 12-month price target of $50.

52-week high: $138.50
52-week low: $9.68

Strong buy. InfoSpace, which syndicates content to Internet and wireless companies, came in with impressive third quarter results this week, posting revenues of $57.7 million.

The revenue figure represents a 190 percent increase from 3Q99. Pro forma profit was $9.5 million, up from $2.9 million a year ago. Analysts expected the company to break even.

"The valuation is compelling," said Jeffrey Goverman of Pacific Crest. "We assume that InfoSpace will capture about 12 percent of the $10 billion opportunity in front of them in 2003 and that the business scales to a 30 percent operating margin."

The recent merger with Go2Net gives the company "scalable models and unified architecture," he said. "The key to the InfoSpace opportunity is to strategically go after the private label opportunity for unified services in the broadband and wireless arenas," he said. "This will certainly resonate with carriers who have portfolios of services, consumers who want one point of contact and merchants who want one commerce platform."

By 2003, Goverman said Nokia and Ericsson project there will be one billion cellular phones. "InfoSpace's plan is to collect some revenue from these phones on a monthly basis and make this a huge business," he said. "InfoSpace is an internet infrastructure play with geometric growth through the addition of more content/services, advertisers, affiliates, countries and devices." He set a 12-month price target of $80.

52-week high: $40.31
52-week low: $9

Strong buy. Metawave, which develops smart antenna solutions, this week reported its strongest quarter to date. Metawave reported revenues of $15.1 million, a 32 percent increase over last quarter, and a 165 percent increase from sales of $5.7 million for 3Q99.

"Strong demand in North America provided tangible sales for the period, while new developments in Asia highlight a growing list of opportunities that will begin to bear fruit as early as next quarter," said Samuel May of U.S. Bancorp Piper Jaffray.

In the wake of this week's release, Piper Jaffray raised estimates for the fourth quarter from $17 million to $19.5 million, and fiscal year 2000 sales from $50.7 million to $55.3 million. The company should reach profitability by the fourth quarter of 2001, though that may occur one quarter sooner, given current trends and enthusiasm among service providers, he said.

May notes that shares of Metawave have come under selling pressure due to expiration of a share lock-up. "We believe fears are overdone and advise investors to take advantage of this window of opportunity while it exists." He set a 12-month price target of $45.

52-week high: $66.93
52-week low: $32

Strong buy. After Boeing's recent third quarter results, Bob Toomey of Dain Rauscher raised 2001 earnings per share estimates from $3.27 to $3.65. He also raised the current year estimates from $2.70 to $2.79.

Boeing delivered 117 commercial jets in the third quarter, bringing year-to-date deliveries to 359. Year-to-date orders are for 475 jets, with a backlog that grew 9 percent in the quarter to $83 billion. "Incoming order levels remain healthy at a level roughly equivalent to approximately 8 percent of the installed base, which indicates that airlines are not over-ordering," said Toomey.

Boeing's space and communications division reported an operating loss of $14 million for the quarter, due to heavy research and development spending on the Delta IV rocket program and Connexion (on-board broadband Internet for commercial planes). Toomey said he now forecasts relatively flat growth for the division over the next couple years due to a soft launch market.

Commercials deliveries in 2001 will remain strong, increasing to 530 jets. "With a sustained higher level of commercial deliveries and margins, we now believe Boeing can sustain EPS growth of approximately 20 percent during the next three years and very strong free cash flow," he said.

52-week high: $54.25
52-week low: $36.25

Neutral. The truck maker and parts distributor this week reported third quarter earnings that exceeded analysts expectations. But, while there is limited downside to the stock, Laurel Johnson of Dain Rauscher said she sees a lack of upside catalyst in the near term.

Paccar reported net income of $93.1 million for the quarter, compared with $144.7 million for Q399. For the first nine months of 2000, sales were $5.9 billion versus $6.4 billion for the comparable period in 1999.

CEO Mark C. Pigott called the truck market in North America "very challenging," noting that industry orders for new trucks in the U.S. and Canada are the lowest since 1996.

Johnson cited negatives such as excess used truck inventories, continuing weak used truck prices and below-trend retail sales. "During the quarter, we estimate that North America revenue declined by more than 40 percent, reflecting production declines of a similar magnitude," she said. At the same time, she noted that Paccar's European business has reached record sales levels this year.

"The market has been impacted in 2000 by a combination of rising diesel fuel prices, rising trucker insurance rates, flattening growth in fright volumes, weak used truck prices and continuing fallout of an inventory glut," she said. Johnson noted that the stock remains undervalued and may turnaround by fall 2001 with the help of lower interest rates and once inventory issues are resolved.

52-week high: $45.25
52-week low: $21.37

Buy. At an analyst conference Thursday, Starbucks reiterated its revenue growth target of 25 percent per year through 2005, with a global target of 10,000 stores by 2005.

Starbucks president Orin Smith said the company had "dramatically underestimated the size of the global market, including the number of points of distribution and the power of the Starbucks brand."

Mark Kalinowski of Salomon Smith Barney said he expects Starbucks to report EPS of 22 cents on Nov. 16.

Company officials said Starbucks has the potential to grow the North American retail store base from approximately 3,000 locations to eventually 7,000 to 10,000 locations. Paul Davis, president of North America operations, said the 10,000 figure is "long-term" and in 2001 the company will add 400 licensed locations and 450 company-operated locations in the North America. Internationally, the company currently has 545 stores, and 3,000 in North America. Officials expect revenues of $6.6 billion in 2005.

"Momentum on the North American retail front remains strong, with same-store sales the last two months coming in at 10 percent," said Kalinowski. While he said some investors have expressed fears the company will not meet its unit growth targets, "the company's track record in this regard is the best indicator that it can stay on the right path."

He reiterated his "buy" recommendation on the stock, with a 12-month target of $50.

Previous columns:

• Lattice Semi sustains top-line growth, 10-20-2000
• Costco stays afloat amid retail wreckage, 10-13-2000
• WaMu increases share in mortgage biz, 10-06-2000
• Cell Therapeutics soars on FDA approval, 09-29-2000
• ESI poised for growth in electronics, 09-22-2000
• SonoSite has first-mover advantage overseas, 09-15-2000
• Starbucks' ice cream melts, coffee is hot, 09-08-2000
• Amazon leverages brand overseas, 09-01-2000