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All Contents © 2020The Kiplinger Washington Editors
By Dana Blankenhorn
| April 27, 2018
Amazon.com (AMZN) shares are trading as though no one can compete with it, up more than 30% in 2018 against a slightly down market. It's climbing over a pile of enemies to make that progress.
Dozens of major retailers – most recently Toys R Us – have been crippled or even killed off by the e-commerce behemoth. There once was a Blockbuster Video on every corner. Sears (SHLD) was once where America shopped. No more, no more. The “retail Apocalypse” is nigh – and it’s even spreading outside retail, as Amazon looks to disrupt other markets such as cloud computing and even healthcare.
Those are some of the factors behind these five potential survivors of Amazon and its mighty scythe.
Data is as of April 26, 2018. Click on ticker-symbol links in each slide for current share prices and more.
CVS Health (CVS, $68.69), believe it or not, actually outdid Amazon in revenues last year, $184.8 billion to $177.9 billion. But you wouldn’t know that based on how Wall Street values CVS and its 9,800-plus locations. The company sports a market capitalization of just $71 billion – less than a tenth of Amazon’s roughly $770 billion in market value.
However, while CVS’s retail operations may be under Amazon fire, the company is building a services moat. Its proposed purchase of Aetna (AET) for $69 billion, announced in December and approved by shareholders in March, would make it one of the country’s largest health insurers should it receive federal approval.
CVS Health’s Coram unit is a specialty pharmacy that offers infusion services, its Caremark unit is a pharmacy benefit manager that can bargain on drug prices, and its MinuteClinics offer front-line medical care in thousands of locations.
“CVS looks to make going to the doctor more convenient and cost effective than ever before,” Tracy Ann Miller says. Moreover, the Aetna acquisition is “a pre-emptive move to counter the threat of Amazon” if the e-tailer moves into health insurance with Berkshire Hathaway (BRK.B) and JPMorgan Chase (JPM), as expected.
CVS has recognized that, in the age of Amazon, health care is a service, says Rachel Ternik, research analyst at Legal & General Investment Management America in Chicago. And CVS’ footprint, which includes a location within three miles of 70% of America’s population, “allows delivery of clinical services that Amazon can’t replicate online.”
Very few companies can say that Amazon needs them, but right now, Amazon still very much needs FedEx (FDX, $246.93).
FedEx is a key part of Amazon’s delivery infrastructure, yet a price-to-earnings ratio of below 15 – well under the market average of 24 – shows just how little faith investors have in that service moat holding.
Miller says that even if things go sour, Amazon represents just 3% of FedEx revenues. The company delivers to more than 220 companies and excels in express international shipping. “If you need to send an overnight check to Somalia, FedEx is your best bet,” she says.
This ability to serve the whole market’s logistics needs is FedEx’ moat against Amazon’s advance.
The biggest Amazon threat to FedEx may be its patents, Kelly says. Amazon “is patenting every delivery concept they can think of, from underwater warehousing to dirigibles, where the final mile might be drones. This freezes out competitors. FedEx isn’t worried today, but they should be.”
Still, “It would take years for Amazon to build a parcel delivery network at the scale of FedEx,” says VanAmburg, and its investment in customer service could continue to set the company apart.”
Courtesy Mike Mozart via Flickr
Hardware – think kitchen sinks – has high return rates. Builders also need things like lumber close at hand. That’s good for DIY retailers like Home Depot (HD, $185.72).
Service is one of the things that matter, as products become commodities, Kelly says. Home Depot “can still differentiate themselves that way.” The stores offer consulting services without a contracting fee.
Miller says that Home Depot sells construction materials not available via e-commerce. “Until Amazon can deliver everything you need to build a house, the same day, Home Depot stands to remain a player.” Tesla (TSLA) solar tiles are coming to 800 HD locations this year, too.
Stephen Lee, a founding partner of Logan Capital Management, an Ardmore, Pennsylvania-based investment adviser firm, notes that Home Depot has “a focus on serving professional contractors” and “kept up with the shift to online retail,” becoming “just as tech savvy in merchandising as Amazon.”
Few stocks have been hit so hard by Amazon without falling over as grocer Kroger (KR, $25.63).
Kroger had sales of $122 billion last year, driving a $1.9 billion profit, and warrants a $22 billion market cap. However, Amazon bought Whole Foods Markets – about a fifth of the size – for $13.7 billion in 2017.
This confuses Ure, who thinks Kroger’s “niche” serving Middle America protects it for years to come, much as Home Depot’s niche among contractors protects it. “Kroger has less to fear from Amazon than other brick-and-mortar retailers,” he says.
“Kroger is out of favor is because the market believes Amazon will succeed in groceries,” says William Smead, CEO of Seattle-based Smead Capital Management, which calls itself a “contrarian” financial advisor. But he believes in this case, the market is wrong.
“Kroger is the best operator of grocery stores in America,” while clearing a 1.5% profit margin, he says. “It costs Amazon $4 to make a delivery, so anything with less than a $4 profit is being delivered at a loss.” Smead recalls the story of Webvan, which tried to deliver groceries at the height of the dot-com boom 20 years ago, and quickly went under. He believes nothing has changed.
If these analysts are right, Kroger may be one of the best bargains in the stock market today.
Netflix (NFLX, $313.98) is actually one of the biggest customers of Amazon Web Services, Amazon’s cloud computing arm. Netflix stores its shows on Amazon’s infrastructure and delivers them using Amazon’s services.
Netflix also is the most expensive stock on this list. The market has high confidence Netflix’ monthly subscriptions can compete directly with Amazon, which also is a competitor thanks to Prime’s own media lineup. As a result, investors now pay a whopping 250 times earnings to own the stock – close to the 260 multiple AMZN fetches.
Netflix enjoys the market’s confidence thanks to its continued growth story. Its 2 million U.S. subscription additions in Q1 were better than expected, and international adds of 5.5 million crushed expectations for 5 million. Revenues exploded by 40% to $3.69 billion. The company is predicting 43% year-over-year growth in 2018, which would outpace even Amazon.
The “secret sauce” of Netflix includes its Open Content Network, as well as its huge investments in content, which have created nearly $6.5 billion in long-term debt. But also vital is the software that consumers use, which suggests what to watch next, collects consumer preferences, and tells management what to buy. Other studios rely on an executive’s gut instinct to drive content purchases.