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Seeking Alpha

Friday, November 30, 2007

Gas is Expensive, So Let's Shop Online

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(Stocks in this article: Nasdaq: EBAY, Nasdaq: GSIC, Nasdaq: AMZN, Nasdaq: NILE, NYSE: MA, NYSE: DKS, NYSE: ARO)

For a consumer who is counting his pennies, the rising cost of filling the tank might be enough to spur online sales to race ahead of their already torrid pace. With this theme in mind, I prospected for some appropriate investment ideas for you and turned up one you knew in Ebay (Nasdaq: EBAY) and one you might not have known in GSI Commerce (Nasdaq: GSIC).

There’s generally no argument any longer that the consumer is carrying a heavy burden including the rising cost of food and energy, increasing unemployment, decreasing home equity, and in some cases, mortgages that are adjusting higher. We have observed gradually easing weekly same-store sales growth rates throughout the year, with this past week’s data from the International Council of Shopping Centers showing a 2.5% annual increase for the period including Black Friday. The overall tally from Black Friday itself showed sales increased over the prior year period, but on a lower ticket per shopper.

So, if the consumer is more price sensitive this year, then rising gasoline prices could be a noteworthy driver of sales trends. Over the past decade, the penetration of the SUV into American society has established the gas guzzler within a great deal of American households. Just two weeks ago, this article at bankrate.com showed the hypothetical cost of filling some of the most expensive tanks on the road at $100+ if gas were to reach $3.50 a gallon. In fact, in real terms after adjusting for inflation, crude prices have already flirted with the historic high of 1980. Gasoline prices are catching up. According to the Energy Information Administration, the national average price of gasoline had reached about $3.10 a gallon in the week ended Nov 26th, though the price had slipped about a penny from earlier this month.

So if consumers grow weary of putting miles on the old wagon, then perhaps online sales will spike even higher than their already hot pace. ComScore, an expert on the subject, projects online sales will increase 20% this holiday season (November and December), to $29.5 billion. This would represent some 24% of total forecast online sales this year. Quoting Paris Hilton, “that’s hot,” but I posit that online sales could exceed that forecast if gasoline prices continue higher.

Based on this thesis, I set out to identify some likely beneficiaries, some of which I hoped might be on sale due to the market’s recent slide. A quick glance at the stock charts of the companies I will discuss here seems to indicate so. A few of these names you already know unless you live on Mars, but one I think might be new to you.

When thinking about online shopping, three names immediately come to mind, including Amazon.com (Nasdaq: AMZN), Ebay (Nasdaq: EBAY) and newcomer and highflier Blue Nile (Nasdaq: NILE). Unfortunately, even though all these names have given back ground along with the market of late, some are still plenty expensive in my view.

Blue Nile

I’m proud to call myself an early adopter when it comes to Blue Nile, after buying the diamond for my wife’s engagement ring from the company some three years ago. However, the company and its stock are no secret anymore. Even after giving back mucho ground recently, NILE’s valuation at 58X the ’08 consensus estimate of $1.32 compares to a five-year growth rate estimate of 24%. That exceeds Cramer’s 2.0 P/E/G ratio danger zone, and I have to agree represents risky territory. Even so, an optimist would note the company exceeded estimates by $0.14 last year. If we add that amount to the $1.32 estimate for ’08, and adjust that number up to $1.46, the stock trades at a P/E of 52. Looking at this year’s earnings growth rate of 38%, we could say the five-year forecast might be understated. However, even if we apply a 30% five-year rate to the adjusted 52 P/E, that’s still offering a P/E/G of 1.7, and not much margin of safety in case we’re wrong or something goes awry. So, I would not buy NILE now.

Ebay & Amazon

Amazon.com (Nasdaq: AMZN) also looks expensive to me at 53X the ’08 consensus of $1.62, given its long-term growth outlook of 23%. But Ebay (Nasdaq: EBAY) seems to offer value, the kind of value that makes you ask why, what’s wrong here. With a P/E of 19.5X and a long-term growth forecast of 18.6%, EBAY looks attractive based on the numbers.

I believe the company’s overpayment for Skype, and related charge in ’07, as well as its diversification across various Internet businesses, like Stubhub.com, Rent.com and others have fogged the picture for some and kept valuation restrained. In my view, this has created a buying opportunity in a proven business model that has plenty of room for international growth and interesting assets like Skype that could prove breadwinners later on. I specifically see opportunity for Skype to develop into a leading social network with a twist, should management take it in that direction. In any event, the company’s marketplaces segment and PayPal look to be solid drivers of growth in the near-term. PayPal just reported a 33% increase in online payment volume this Black Friday, compared to last year’s big day. PayPal is becoming a serious competitor to other payment processors like Mastercard (NYSE: MA). Thus, I would buy EBAY here.

GSI Commerce

GSI Commerce (Nasdaq: GSIC) is a rising mid-cap in the net space. The company helps traditional retailers with the online end of their operations. GSIC boasts a client list 50 strong and growing, including mostly well-known retail names like Dick’s Sporting Goods (NYSE: DKS) and Aeropostale (NYSE: ARO).

GSIC has managed to grow its revenues at a 43% average annual clip from 2001 through 2006. However, if you look at the consensus ’08 EPS number, you get a GAAP estimate that includes a special tax item. Needham & Co.’s Mark May, who rates the stock “Hold,” has an adjusted fully taxed EPS estimate for FY 08 of $0.60. That represents 150% growth over May’s ’07 expectation of $0.24. If we use his ’08 EPS estimate, we get a P/E of 44X. Applying the long-term analysts’ consensus growth forecast of 31%, that puts GSIC’s P/E/G ratio at 1.5. That’s not bad considering the relative valuation of the company’s peers discussed in this article, and given GSIC’s strong growth. I have a hunch growth estimates could prove conservative, given the company’s solid client footing, and likely greater ability to attract new customers as a result. Thus, I would call GSIC an “accumulate” or soft buy here. After all this insight, all you have to do now is boot up and shop for your stocks.

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