Gas is Expensive, So Let's Shop Online
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.
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.
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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