Amazon: A Compelling Buy Candidate In 2012

| About:, Inc. (AMZN)

Amazon (AMZN) continues to grow by leaps and bounds, as plans are now in the works to open a fulfillment center and a calling center in the Midwest. As the company grows, I see its competitors, especially big-box retailers like Best Buy (BBY), having to come up with some pretty brilliant plans to be able to not just compete, but also to stay in business.

To handle its growing online business, Amazon announced it will open a fulfillment center in Jeffersonville, Ind. It is scheduled to open by 2015, and will cost $150 million. To attract Amazon to build the fulfillment center in Jeffersonville, the Indiana Economic Development Corporation is giving it roughly $2 million in tax credits and training grants.

Also, the company is in negotiation with Kentucky officials to open a call center in Winchester. This deal also entails tax incentives. To make the Kentucky deal happen, the state's economic development finance authority approved a $10.2 million tax incentive package. This is a $20 million investment by Amazon.

While these centers were being announced at the end of March, Best Buy was announcing that it was closing stores. In fact, when Best Buy released its fourth quarter earnings report for fiscal 2012, it said it would close 50 stores in 2013. It has set a goal to cut costs by $800 million by fiscal 2015, with $250 million of those reductions coming in 2013.

It remains to be seen if these measures will be enough to turn things around for Best Buy. One of the biggest challenges the brick and mortar electronics retailer has faced is in the high-growth technology market of tablets and mobile phones.

Some estimates place the amount of its profits from these items at less than 15%. Most of its revenues come from the sales of televisions and personal computers. Unfortunately, there is not as much demand for these products as there are for tablets and mobile phones.

Quarterly earnings reports that Best Buy filed last year show that it did see an uptick in sales from its mobile phones and mobile computing devices like tablets. For example, during the first quarter of fiscal 2012, its mobile phone sales were up 28%. In another example, its online revenues were up 12% in that same quarter. I see the company's ability to increase its revenues from online sales as favorable. It shows it can compete with Amazon.

Best Buy also faces competition from companies like Wal-Mart (WMT) that are able to offer lower prices. However, given the sheer size of Wal-Mart, I won't spend much time discussing it as Best Buy's competition. It's a part of the threat to Best Buy, but it is not the most immediate threat.

To add insult to injury, Amazon is poised to even strip Best Buy of the earnings it can make from personal computer and television sales. Savvy shoppers will go to Amazon to comparison shop, and many will use that information to buy from other outlets.

Best Buy's stock has really felt the heat from Amazon's rise. Over the last five years, its stock has fallen from $52 to around $25. I think one of the best indicators of Best Buy's performance is its earnings per share. For fiscal 2009, it had expected them to reach between $3.25 and $3.40, which would have been a 7% increase. That has trialed off to $2.90 now.

Let's take a closer look at the fundamentals of these companies. Amazon's market capitalization dwarfs that of Best Buy. It is $92 billion compared to Best Buy's $8.3 billion. Neither company comes close to Wal-Mart's market cap of $208 billion, both that clearly reflects the larger and more diverse offerings from Wal-Mart.

When you look at the margins of Amazon and Best Buy, there are similarities. Amazon's gross margin is 22.44%, Best Buy is 24.7% and Wal-Mart is 25.02%. This shows that all three are managing to keep their costs in line with profits. Considering all of these companies operate in the discount retail space, I would like to see their margins at these levels or even lower.

Best Buy was able to outdo Amazon in terms of revenues last year. Best Buy's revenues totaled $50 billion compared to Amazon's $48 billion. Once again, these numbers come nowhere near Wal-Mart's $446 billion of revenues. The reason is the same: Wal-Mart is bigger.

Best Buy's commitment to its shareholders can be seen in its dividend payout. At the end of March, it announced that it would pay its regular quarterly cash dividend of $0.16 cents per common share. Amazon does not pay dividends.

Best Buy's quarterly dividend is payable on May 10, 2012, to shareholders of record as of the close of business on April 19, 2012. The company had 341,400,131 shares of common stock issued and outstanding as of March 3, 2012.

Amazon's ability to be lured through state tax incentive programs speaks volumes about the company's benefits. I don't see states rushing to give away money to Best Buy. While Amazon is a buy, I'd hold Best Buy as it works through the financial goals it outlined for investors last month as a part of its attempts to turn its finances around.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.