Internet Commerce Will Make or Break these 3 Companies
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In 2011, $194.3 billion of all internet sales occurred in the United States. This was a 16% advance from the 2010 figure, and there is little doubt that the number will move past $200 billion once numbers are released for 2012. I wanted to take a look at a few big internet operations to see how they are doing in this still struggling economy.
Consumer Reports surveyed its vast membership to determine winners and losers of internet retailing. Surprisingly, one of the big winners was Costco (NASDAQ: COST). This company is best known for its 605 warehouse locations spread across North America, but has stores in Europe and Asia as well.
While those who shop on Costco's website clearly enjoy the experience, Costco does not have as large an online business as one might imagine. Costco is this country's second largest retailer, behind only Wal-Mart (WMT), and the seventh largest retailer in the world according to its website.
Since 2006, Costco has opened an average of 22 stores per year, and spent about $1.3 billion per year on capital projects. It has virtually ignored its online component, which has provided just over 2% of company sales in recent years. But that may change soon, as the company recently made a commitment to take advantage of its huge and loyal customer base in order to drive up its internet presence.
Overall I like Costco. Its stock price is currently just over $100 per share, perilously close to its record of $103 per share. And its price to earnings ratio is a hefty 28. But the consistency of this retailer's revenue and profit increases is impeccable. In its fiscal third quarter, earnings grew 21% year over year to $386 million, or $0.88 per share.
If the company can increase its internet presence and continue to open stores, both of which are likely, its earnings growth will continue. I believe earnings will rise in the mid-teen percent range on a year to year basis. That is because in addition to store openings, Costco has continued annually to raise its sales per square foot, from $127 per foot in 2007 to $146 per foot in 2011.
When one sees rising square footage, combined with rising sales per foot, along with a commitment to online expansion, there is little reason to doubt Costco's future. It does have a PEG of 2, so it is not for the strict value investor, but for the rest of us Costco makes a peerless large cap retail choice.
Nordstrom (NYSE: JWN) also received high marks in the Consumer Reports survey. This high-end retailer has returned a total profit of 700% to any individual with the foresight to purchase shares in late 2008.
Unlike Costco, Nordstrom's online division is supporting the overall growth of the company. In the past two quarters the online division has shown annual increases of over 35% compared to the prior year's quarters, and has surpassed 10% of Nordstrom's overall revenue. The company is planning to invest $1 billion, or about one third of its capital budget, into its internet arm over the next five years. Nordstrom is also focusing more on its lower cost “Rack” division than its core full service division. These Rack stores contributed 20% of revenues through the first two quarters of this year, and a look at Nordstrom's plans shows it is opening Rack stores all around the country.
Analysts are looking for profit growth of about 12% going forward, giving Nordstrom a reasonable 1.27 PEG. If the company can use its burgeoning internet division to create the free cash flow needed to retire some of its excessive debt, I can see Nordstrom being a long-term winner.
Facebook (NASDAQ: FB) is the world's largest social networking site, currently approaching one billion members. For the past several months, it has been working to pick up the pieces from perhaps the worst highly anticipated IPO in modern history. But a funny thing happened as the company's stock slumped from an opening day price of near $40 per share in May, to less than half that amount by mid-September. It became a company that I think is worth paying some attention to.
Nothing has changed since May, except the market values Facebook at only half as much as before. In turn this makes all the numbers and ratios work so much better. In fact I am not the only who has noticed as the company has enjoyed a 20% stock bounce since early September.
Facebook's big problem is it was never built to become a money making enterprise. Mark Zuckerberg and friends have certainly been trying to successfully monetize the site, but I still wonder whether Zuckerberg really wants to run an enterprise devoted to profits. Much of the monetization focus is on mobile applications.
Analysts see earnings rising near 30% annually the next five years, helping to drive down Facebook's PEG to a reasonable 1.5. If you are a fan of Facebook, now might be as good a time as ever to enjoy the reverse of what happened to the stock in the early summer.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Costco Wholesale and Facebook and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Costco Wholesale and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.