Thursday, March 05, 2015

Amazon vs. Wal-Mart - My Annual Comparison

Here is a high-level comparison of Amazon to Wal-Mart. Note that Amazon uses a calendar year, while Wal-Mart uses a traditional retail fiscal calendar ending January 31st. I’ve compiled some numbers and ratios from each company for their respective fiscal year periods that include most or all of 2014. Therefore this comparison is slightly off. However, the comparison does include the traditional peak seasons of back-to-school and Christmas in both.
To make my job easier, I’m listing Wal-Mart first each time in the following comparisons.

Revenue: (in billions)
Absolute:  $485.6 vs. $89.0
Revenue Growth $:  $9.4 vs. $14.5
Revenue Growth %:  2.0% vs. 19.5%

There is no question that the clear growth winner is Amazon – adding $5.1 bil more in revenue in the last twelve months despite Wal-Mart’s base size advantage.  And the rate of growth is indeed impressive at almost 10X Wal-Mart’s.

Operating income: (in billions)
Absolute: $27.1 vs. $0.2
Operating income growth $: 0.3 vs. $(0.5)
Operating income growth %: 1.0% vs. negative
Operating income as a percentage of total revenue:  5.6% vs. 0.2%

While Amazon exceeded Wal-Mart’s revenue growth, Amazon managed to add $14.5 billion in revenue and not have any of that flow to operating income.

Net income: (in billions)
Absolute: $16.4 vs. $(0.2)
Net income growth $: $0.3 vs. $(0.5)
Net income growth %: 2.1% vs. negative
Net income as a percentage of sales: 3.4% vs. (0.3)%

Amazon has no income.

Cash Flow: (in billions)
Note: cash flow as presented here is: cash flow provided by (used in) operating activities. That is, net income plus depreciation, amortization and stock comp plus changes in working capital. These are taken directly from the financial statements filed with the SEC for Amazon and the earnings release for Wal-Mart.

Absolute: WMT $24.4 vs.  AMZN$ 6.8
Cash flow as a percentage of revenue: WMT 5.2% vs. AMZN 7.7%

I’ll admit that I found this percentage was particularly surprising. Given that Wal-Mart starts with a 3.7 percentage point advantage from net income, how does Amazon end up with a higher percentage?  The details point to two factors: depreciation and amortization (non-cash) account for a far larger share of revenue for Amazon [5.33%  than for Wal-Mart [1.88%] and stock compensation (again non-cash) is a much larger percentage of revenue for AMZN than WMT. (Note that Wal-Mart did not show stock comp as a separate component in its earnings release. Therefore I’m concluding that it is less material. WMT certainly has stock comp expense. I may find time to update this when it files its 10K). Given the physical store presence of WMT, AMZN’s higher depreciation and amortization is also somewhat surprising. Does AMZN have a more conservative depreciation policy?

Returns
ROIC: WMT 13.3% vs. AMZN (0.7)%
ROE: WMT 19.6% vs. AMZN  (2.4)%

ROIC defined as net income plus tax-affected interest expense divided by equity capital plus interest bearing debt. Equity plus interest bearing debt is calculated with a two point average of beginning and ending balances.

ROE is a simple net income divided by a two point average of beginning and ending equity.

Valuation
Price to sales: WMT 54.9%; AMZN 200%
Price to book: WMT 3.1X; AMZN 16.6X
Enterprise value to EBITDA: WMT: 8.7; AMZN: 38.

Disclosures
I own $WMT. I’ve owned it for a very long time. I don’t own AMZN. 
I shop both regularly, particularly the Sam’s Club division of WMT for numerous products, and principally books and music from AMZN.  I’m a loyal customer of each. I’m also a published author on Amazon Kindle. Two titles: Jobs Over Fifty: The Guide to Finding New Employment for The Experienced Worker and Survive And Prosper Fifty Steps to Job And Career Security.

Observations
Clearly holders of Amazon are being rewarded for stellar revenue growth and industry disruption.  And one could argue that those factors require some non-traditional valuation techniques.  I would argue to the counter: Amazon is no longer a new business; it has been around now for a generation.   I assume that there is little further efficiency gain for Amazon–i t operates highly efficiently today–or that any productivity gains it achieves are likely to be matched by similar gains by Wal-Mart. Therefore, it is difficult to see how Amazon produces an attractive return on capital without price increases-which would, in turn, reduce its advantage.

There are claims that Amazon’s real value lies in its cash flow. And clearly it is higher as a percentage of revenue.  But WMT’s absolute cash flow dwarfs AMZN, albeit that much of that is consumed by dividends which AMZN doesn’t pay.

WMT’s ROE benefits nicely from years of stock buybacks thinning the equity as well as a decent level of leverage.  The resultant ROE (using an average of beginning and ending equity) is a very respectable  19.6% and ROIC, helped by very low interest rates, is a little better than average at 13.3%.  Conversely, I would argue that, while Wal-Mart can clearly handle its debt load, the amount of leverage may be hurting the share price some.

Finally, the returns on capital speak for themselves. If you have essentially no income, you have no return to capital.  If shareholders never demand a return of their capital, then I suppose there is no reason to provide a return.  A unique business model indeed.

My Position

I’ll continue to hold Wal-Mart, collect my increasingly rich dividend, and shop at both.  I predict that Amazon’s share price will come to earth at some point, but I don’t have a sufficient conviction to short it – and shorting against a billionaire CEO is too risky a strategy for me.