Strong buys
Gone e-tailing 2001-10-12
There are online retailers that are surviving and thriving, even in this market.
by Shannon Swingle, contributing editor
If you thought Internet retailers were either gone or on their way out the door, guess again. There are a few standout players that have successfully capitalized on their niches and come out stronger for their trials in this increasingly difficult economic environment.
All retailers have been affected by poor consumer spending, a trend that was exacerbated by the events of Sept. 11, but certain online players have managed to relatively insulate themselves by capitalizing on strong branding, establishing themselves in specific specialty markets, and by expanding those markets by expanding their product mix to include complementary items.
Robertson Stephens, in a Sept. 28 "Multichannel Retailing Update" for institutional and retail investors, continues to recommend industry-leading franchise names with the least downside risk. One that comes to mind for many analysts is eBay (EBAY), but there are others out there, including teen-focused direct marketer Alloy (ALOY), and 1-800-FLOWERS.COM (FLWS), which counts Goldman Sachs as a fan.
Not surprisingly, given how badly the firms and investors were burned by e-commerce stocks in the recent past, analysts are issuing stringent caveats to their significantly restrained but nonetheless genuine enthusiasm for Internet retail stocks.
Robertson Stephens says that one principal characteristic it looks for in a retail stock is for the company to have a clear identification of its market, but suggests that other strategic and financial signposts, such as a focus on value orientation, market share gains, attractive growth opportunities, and valuations, are also important considerations.
Goldman Sachs, in its Oct. 5 institutional report entitled, "Internet Industry Navigator," also outlines very tough standards it uses in evaluating e-commerce stocks, particularly in this current environment. "Given the unfavorable consumer spending outlook, we favor platform companies that are clear leaders in large growing online markets, with brand leadership, diverse revenues, category/market expansion growth, pricing power, limited financial risk from physical fulfillment and potential to generate superior return on investment capital," it says.
EBay, the online auction site, is on the Goldman Sachs "recommended list," and the firm notes that EBAY is growing at twice the rate of the overall e-commerce sector.
Prudential Securities is another EBAY booster, reiterating its recommendation of the stock as a "buy" and "single best idea" status in its Sept. 25 institutional and retail reports.
Even though the company will be affected by a seasonal slowdown, compounded by the events of Sept. 11, Prudential’s Mark Rowen expects the company’s third quarter results to be "in line to slightly better than expectations," with the Germany and Motors divisions pulling their weight in the next quarter. Rowen, in fact, is so confident of a solid third quarter that he has increased his revenue and EPS estimates.
Derek Brown of W.R. Hambrecht + Co. has a "strong buy" rating on the company. In his Sept. 25 institutional and retail reports, the analyst notes that there is strong expansion activity at eBay, with Half.com, its fixed-price trading business, recently launching eight new categories. According to Brown, fixed-price trading is a large, untapped opportunity for eBay that is likely to impact the company over the long term.
Flowers for all
Another e-commerce retail company that is holding up nicely in this difficult environment is 1-800-FLOWERS.COM. Goldman Sachs calls the company a "strong consistent small-cap cash-flow story."
Eric Beder of Ladenburg Thalmann maintains a "buy" rating on the shares in his Sept. 25 institutional and retail notes, saying that management appears to be comfortable with analysts' estimates for the fiscal first and second quarters. This is a plus, because Beder believes that in this period of crisis, any confidence will encourage investors.
But that’s not all there is to this story. This retailer of high-margin gifting solutions has shown that its business concept is a success, according to Beder. The company is now both EBITDA and EPS positive, validating its multi-channel platform, says the analyst, who expects the company to continue to show above-average returns, thanks in part to the company’s successful cross- and up-selling strategies. "We believe the company’s low customer acquisition cost and continued penetration of the thoughtful gifting arena with an ever widening range of products portends that 1-800-FLOWERS.COM will be that rare online provider that can offer a wide array of high value products that users will gladly pay a premium for," he says.
Generation whatever
Another online retailer that seems to defy the affects of current economic conditions is Alloy, a direct online marketer of Generation Y-focused (ages 10 to 24) products and services. The company’s Web site provides community, content, commerce, and entertainment to this fast-growing Internet population. U.S. Bancorp Piper Jaffray’s Jeffrey Klinefelter maintains a "strong buy" rating on the shares in his Oct. 4 institutional and retail reports.
The company’s recent further expansion into the teen boys market, with its pending acquisition of direct marketer Dan’s Competition, provides Alloy with another destination brand and a database of teen boys, Klinefelter says. (Dan’s Competition focuses on the action sports market, which includes the BMX bicycle brand.)
Klinefelter sees this acquisition as a good fit, since both companies have an "omni-media" approach to business, incorporating both print media and a strong online presence.
Jefferies & Co.’s Michael Legg reiterates his "buy" rating on ALOY in Oct. 3 institutional and retail reports, citing the acquisition of Dan’s Competition as a strong plus for the stock. With about $24 million in cash and marketable securities, as well as operating profitability, Alloy should have no trouble acquiring companies that will further expand its reach into Gen Y markets, says the analyst.
By the way, Gen Y demographic is nothing to scoff at. It is estimated that Gen Y accounts for more than $250 billion in annual disposable income, says Robertson Stephens' Lauren Cooks Levitan, and could amount to $325 billion by 2005. Levitan reiterates her "buy" recommendation on Oct. 4 in an institutional report.
Name and Ticker Analysts (1) Av Rec (2) Strong Buys (3) Cur Yr PE (4) Nxt Yr PE (5)
1-800-FLOWERS.COM (FLWS) 6 1.6 2 NA 55.83
Alloy (ALOY) 7 1.5 4 169.04 19.68
eBay (EBAY) 25 1.96 7 101.22 63.81
1. Number of analysts covering the stock in the current quarter.
2. Average analyst consensus estimate recommendation where "1" is the highest rating = "strong buy"
3. Current number of analysts' "strong buys."
4. Price-to-earnings ratio projected for the current fiscal year.
5. Price-to-earnings ratio projected for the next fiscal year.
Source: NetScreen Pro; data set Oct. 8, provided by Market Guide Inc.
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Auch wenn gerade jetzt von den Analysten gepusht, würde ich persönlich bei Alloy auf einen Abschwung warten.
mfg, airest
