Sunday, June 18, 2017

The Finanical Press is Lying to You.

Is the financial press hyping some stocks and running down others?   Yes.

A reader writes, "I tried the MSN news website and what is curious is that I cannot see any ads on it.  How do they make money if they don't have any ads?"

And the answer is, I think, that the articles are the ads or at least some of them are. I have soured on the MSN site as it seems to be sensationalist and relies too heavily on The Washington Post and The New York Times for its sources.  The "Technology" section seems to be ads written as articles.  "Is the new smart phone super-duper, or just super?" is the sort of gushing commentary they have.  Or they have a plethora of articles speculating on what the next smart phone will be like - to be announced next Tuesday!  Not that we're hyping it, of course.

The "Money" section seems to be little more than a platform for pump and dump traders to hawk their wares.  One month, a stock is disparaged (Ford) and then the next month it is hyped (Ford again).  As I noted, I am staying out of that one as it seems that indeed, people are manipulating the stock price, and that overall, the auto industry (and indeed the country) are headed for recession.

More than one article has appeared about how great Amazon is, and how now that they have acquired niche food retailer Whole Foods, they are going to put Wal-Mart out of business.  It will change the way you buy food - forever!  Uh, not really. While it is an interesting move on Amazon's part, I don't think the people from the ghetto or the trailer park are going to switch from buying lite beer at Wal-Mart to buying asparagus water at Whole Foods, just because Amazon owns them.

And I am not taking a jibe at Wal-Mart or its customers, either.  Wal-Mart serves a huge cross-section of America, from the very poor, to the middle-class to the upper-middle-class (the smarter ones, anyway) as evidenced by its product mix. Most of the upper-middle-class customers are refugees from places like Whole Foods, much as we were refugees from Sutton Place Gourmet. We realized that spending 2x, 3x, 4x, or 5x for food is just stupid, particularly when the products are similar or often identical (same brand, even) at Wal-Mart. So I doubt the upper-class customers of Wal-Mart are going to flock back to Whole Foods, and the poorer customers simply cannot afford to do so.

But like the Ford debate, you have to look at the numbers.  Ford sells more cars in a week than Tesla does in a year.   And Wal-Mart is, well, huge.  How huge?  Well, let's look at the numbers:

Number of Stores: 4,177 in USA (not including Sam's Club)
Number of Distribution Centers: 52
Number of Employees:  1.4 million (US) 2.1 Million (worldwide)
Revenue:   US$485.87 billion (2016)
Operating income:  US$22.76 billion (2016)
Net income:  US$13.64 billion (2016)
Amazon/Whole Foods:

Number of Stores: 431 (Whole Foods)
Number of Distribution Centers: 96 (Amazon)
Number of Employees:  341,000
Revenue:  US$135.99 billion (2016)
Operating income:  US$47.70 billion (2016)
Net income:  US$ 2.37 billion (2016)
There is one 600-lb gorilla in this picture, and it ain't Amazon.  One of these companies has its own fleet of trucks, and no, it ain't Amazon.  Note that Wal-Mart has nearly six times as much income from about 3.5 times as much sales.   Someone is a lot more efficient - at a much more difficult business!

What we have here are two companies trying to get into each other's space.   Wal-Mart has been trying to break into online sales, with limited success.  Only $12.5 Billion in online sales last year, according to Fortune magazine.   This makes Wal-Mart the second largest online retailer in the US, behind only Amazon. So while $12.5 Billion doesn't sound like a lot, it is not a bad effort for a company that has only recently gotten into this space and hasn't really hyped or promoted its online service as an alternative to Amazon. And granted, with the prejudice some people have against Wal-Mart (myself included, in terms of online sales) it may take time for Wal-Mart to ramp up sales.

But getting into online sales, when you already have warehouses and a distribution network is a lot easier to do than to get into brick and mortar when all you have is online sales.  And Amazon has a much harder job, as they will have to learn the painful ins and outs of retail, where margins are razor-thin and the overhead can kill you.   You also have to learn how to deal with massive numbers of employees, each more than willing to slander the name of your company either by being a poor worker, or by stealing, getting fired, and then blaming you.   Amazon has already had its share of labor strife.   Wal-Mart is expert at it - and expert in crushing union activities at its stores.

Do you think Amazon has the capital to open 4,000 stores in the United States?   I am doubting it.  

The method Amazon has chosen to enter the retail market - if indeed that is their motive - is odd.  To pick one of the most upscale, customer-losing grocery chain, at the start of a recession, seems like an odd pick.  Unless they can re-brand Whole Foods as a lower-cost Wegman's and not Balducci's (without the talent), they are not going to do very well with this hybridization.  In fact, I suspect it could bring Amazon down in the long run.

Think about it.   First of all, odds are there is no whole foods near where you live, but a Wal-Mart within 20 minutes of your house (there are three, including a Sam's Club, in our tiny town).  Second, even if there was a Whole Foods near your town, are you about to start shopping there because Amazon bought them?  Hell, no.  You are either a Whole Foods shopper or you are smart.   And since Whole Foods stores are not large enough, they cannot be morphed into the "big box" type stores that Wal-Mart benefits from.   You go to Wal-Mart for groceries, you leave with a new car battery, a hunting rifle, a pair of jeans, and a new TV.

This is, of course, assuming that Amazon intends to follow Wal-Mart's lead and use their network of stores to leverage their online business.  "Ship to store" makes sense if you are going to the store anyway and you get a discount.   Wal-Mart is even experimenting with employees delivering packages on their way home from work.  They have a huge infrastructure at their fingertips.

Meanwhile, the idiotic financial press touts headlines like, "Whole Foods will now deliver organic kale to your house by drone!"  - perpetuating the myth that Amazon is using drones to deliver its packages on a regular basis, when in reality, the UPS man is who is dropping the boxes by your door (and letting the neighbors steal them - youtube it.  Another reason for "ship to store").

It is clear that Wal-Mart is the heavy hitter here, not Amazon.   Wal-Mart can get into online sales with little risk of capital, and use a lot of its existing infrastructure.  Amazon, on the other hand, has a Herculean task ahead of it - trying to build a nationwide retail presence in the food business, about which it knows nothing about.   And its oddball acquisition of Whole Foods doesn't seem like it would help them much, but rather drag them down.  A more mainstream retailer like Publix, Wegmans, or Kroger, would make more sense.

But that's the rub.  It is a cut-throat business these days, and as a result, buying a grocery chain isn't easy or cheap.  Running one even harder, particularly as more and more people clamor to get into the business.

And as for Amazon's vaunted "expertise" in online retailing?   I see cracks in the facade.  I ordered a mulching machine and they delivered a toilet.   They told me to keep the toilet.  I ordered three kinds of LED bulbs, they sent me four.  I return one that cost $12, they credit me the $12, but recognize the return as some other bulb and credit me an additional $50.   Now they claim I never returned the other bulb and threaten to charge me $19 for it (!?!).  They make a lot of mistakes in ordering and their back-room seems disorganized as well.   High overhead (or conversely, low profits for shareholders) mean that no one expects them to make much of a profit.  So they don't.

The real story is in the numbers.   You see one "old line" store that is making decent money, has a reasonable P/E ratio and even pays a decent dividend in this day and age.
Wal-Mart Stores Inc
NYSE: WMT - Jun 16, 7:58 PM EDT
Open:  73.95
High: 75.50
Low: 73.29
Mkt cap: 225.27B
P/E ratio: 17.08
Div yield: 2.71%
Then there is Amazon, highly hyped, clearly over-inflated in value with a P/E ratio about ten times higher than it should be.  Can you wait 185 years to get your money back - or can your great-great grandchildren wait that long?  Or do you seriously believe that they can increase their profit margins by a factor of ten in the next few years?, Inc.
NASDAQ: AMZN - Jun 16, 7:58 PM EDT
Open: 996.00
High:  999.75
Low:  982.00
Mkt cap:  466.15B
P/E ratio: 185.06
Div yield:   nuthin'
Don't get me wrong, Amazon is a fun place to order shit, so long as they don't send you a toilet instead of a mulcher. I am finding that eBay is a better site for ordering stuff directly from China.  For example, an LED string light set is $12 on eBay while the same item is $29 on Amazon.  Both have free shipping, with eBay you may have to wait for China Post, though.  The barriers to entry in online sales are far lower than the barriers to entry in brick-and-mortar sales.   And therein lies the difference.

Amazon, as a "tech" company (really?  Selling shit on the Internet is "tech"?) can get away with reporting little profits and paying no dividends.    Wal-Mart, as a traditional retailer, is expected to make money and pay shareholders back.   Its online sales have to follow the same pattern as well - they have to make money for the company and shareholders, or it doesn't make sense.

The thing is, eventually Amazon has to make money, too.   You can't stay in business forever with a P/E ratio in the hundreds.   Eventually shareholders want to see a return on their investment.  And not in 185 years, either.

The financial press never reports this and never sees it.  All they see is skyrocketing share prices and exciting "tech" companies that generate headlines and clicks, when you write articles about them.   No one clicks on an article about an old-line company, unless you are reporting its demise.  The CEO of Sears was partially right about that - the epitaph of his company has been written for nearly a half-decade so far.   But what is killing Sears isn't Amazon.   It's Wal-Mart.