Amazon And Starbucks Earnings Preview: Giving Growth A Good Name

Includes: AMZN, SBUX
by: Brian Gilmartin, CFA

Growth investors (and value investors too, since the two camps often act like Democrats and Republicans when commenting on the other's investment strategy) will often tell you that "valuation matters when it matters", meaning a seemingly overvalued stock can rise for months or years, without a meaningful correction, and then once earnings and revenue growth become an issue, the air comes out of it quickly.

Two growth stocks - Amazon (NASDAQ:AMZN) and Starbucks (NASDAQ:SBUX) report after the bell Thursday night, April 25th, 2013, and both stocks have had a remarkable run off the March, 2009 low. Both stocks are hated by rigorous value investors. We'll look at each one with our thoughts on valuation and the technical set-up prior to earnings:

Amazon: Margins and Revenue growth story

There is a lot going on within the AMZN story, but for now it is all about revenues and margins, since earnings per share (EPS) has been crushed the last two years with large investments in SG&A.

Value investors hate Amazon for good reasons, mainly the 190(x) p.e ratio and the other stratospheric valuation measures, but some consider AMZN to be not a technology company but a global play on consumer spending and a disintermediator in the retail space.

Nothing seems to dent the stock price, not the prospect of the internet sales tax, or the crushing of EPS, or subdued sales guidance.

Not all the valuation measures are at extremes: AMZN's price to 4-quarter trailing sales is just a little over 2(x), and AMZN's price to cash-flow and enterprise value (EV) to cash-flow is 25(x), which seems extreme, but is cheaper than Nike's (NYSE:NKE) price to cash-flow.

Trefis published a research report on April 23rd, saying that visibility on profit margins is needed to lift the stock. I agree with that in part, as long as revenue growth can be sustained. If Amazon can simply return to operating leverage on their expense base as they slow distribution center growth, EPS should begin to rise again quickly.

Amazon's Margins - last 5 quarters







12/31/12 24% 4% 20%
9/30/12 25% 11% 15%
6/30/12 26% 10% 16%
3/31/12 24% 10% 14%
12/31/11 21% 10% 11%

* Source AMZN P/L, internal s/sheet, 10-Q

Analyst consensus on Thursday night is looking for $0.09 per share on $16.17 billion in revenues for an expected year-over-year decline in EPS of 68% on 23% revenue growth.

AMZN's lowest rate of y/y revenue growth the last 14 years is 26% and the average over the last 14 years is 29%, and AMZN is still just 10% of Wal-Mart's (NYSE:WMT) annual sales.

Technically, the uptrend line off the 2009 market low sits around the $240 area. We'd buy more there on a pullback in the stock, depending on what is in the earnings report.

Our thought is Amazon is still a secular growth story, but be disciplined on your entry point.

Starbucks: Comp's and Traffic still healthy

While it is a growing trend in retail, SBUX stopped reporting monthly comp's back in 2006, 2007, and from that we gathered that something was afoot and wound up selling the stock.

SBUX recent Qtrly Comp's - attribution
Qtrly comp Overall traffic



12/12 6% 4% 2%
9/12 6% 5% 1%
6/12 6% 5% 2%
3/12 7% 6% 1%
12/11 9% 7% 2%

As the reader can quickly see, SBUX is still generating strong monthly compares, more from foot traffic than the price component. China comp'ed at 11% last quarter, with 8% traffic and 3% price.

Still the future for SBUX is the Consumer Products Group (CPG), which is the non-store SBUX brand building products, that used to be handled through a joint venture with Kraft.

CPG is roughly 15% to 20% of SBUX's total operating income, but has been growing at a 25% - 31% clip the last 6 quarters, with a 20% operating margin, greater than the 15% - 16% operating margin of SBUX's overall business. This business is really just getting started, with a far bigger market than SBUX's US store base.

The big caution flag for SBUX is that EPS and revenue estimate trends the last 12 - 13 months have been flat, or fairly constant, which for a growth name like SBUX is not what you like to see. That being said, SBUX stock has been consolidating in a range between its all-time high of $62 in April, 2012 and its low last summer of $43.

Analyst consensus is looking for $0.48 and $3.6 billion Thursday night for y/y growth of 20% and 12% respectively. Analyst consensus is looking for 12% revenue growth and 20% EPS growth the next 3 years.

The key to buying growth stocks is looking for lower-risk entry points. We'd look hard at adding to Amazon near $240, and SBUX near $52, qualifying that by saying we look at volume and other factors as growth stocks near support levels. Sometimes support doesn't hold.

Disclosure: I am long AMZN, SBUX, WMT, NKE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.