Blue Nile: Rising Precious Metal Costs Could Present Roadblock

Brian Bolan, research analyst at Jackson Securities, sent a note to clients updating estimates on Blue Nile (NILE). Key excerpts follow:

Quick Discussion

Blue Nile guided to $61-$63M in revenue for the first quarter, and our estimate of $58M was based on an ASP of $1500 and under 40,000 orders. We have subsequently increased our number of orders to over 41,000 and held our ASP constant. This has brought us more in line with consensus and guidance as we are now at $62M on the top line.

We also bumped up our estimate for SG&A to roughly 14% of sales. This offsets some of the increased revenue to keep the bottom line roughly in line with guidance. We are also adjusted the number of shares outstanding for the quarter to 16.6M. The net effect is an EPS number of $0.15. We believe that the extra revenue, along with a slightly higher SG&A number ends up being washed out by the higher number of shares.

Its somewhat unlikely that the driving force behind the most recent rally in the stock has been the company itself… meaning the stock buy back program probably hasn’t taken that much of a hit. That said, the valuation is reaching some lofty heights in the face of rising costs. This might signal a time to take some profits off the table, as we reminder investors that the stock dropped some 6.5% the day of the 4Q06 earnings release. We may see a similar move when the company releases results on May 7, 2007.

The rising costs we spoke of are generally passed on to consumers, but we fear they may not be able to pass along all the costs. Included below are the price graphs of select precious metals. As is clearly evident, the costs were rising throughout the quarter. This could present a roadblock to a “street beating number.”

click to enlarge

Disclosure: Jackson Securities, LLC does or seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions.

Comments

[Michael Dem...:]

Brian, based on your research what % of COGS do precious metals comprise given that NILE's business is heavily weighted towards diamonds and precious stones?

2007 Apr 27 02:30 PM