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Tuesday, October 24, 2006

How to Peg Earnings

The hardest part of earnings on a company like (AMZN) is forcing yourself to look ahead at the company with binoculars rather than looking back at its results in the rearview mirror.

The street is expecting $0.03 EPS and $2.25 Billion revenues, but this is yet another of the quasi throw-away quarters. Next quarter the company is expected to post $0.22 EPS on revenues of almost $3.7 Billion. With its shares up 1.3% today, Amazon has roughly a $14 Billion market capitalization rate. (AMZN) 200-day moving average is $34.75. The stock has been getting closer and closer to that 200 day moving average, but has been trading under it since January of 2006 when the stock was up at much higher levels of $40 and above. Since early 2002 this appears to be the longest period it has spent under that 200-day moving average. While that may be anecdotal of nothing going forward, it may be a great indicator for a contrarian.

The recent short interest data for October is not yet official but AMZN has been running with over 40 million shares listed in the short interest. That is over 10% of the float.

The current month options may not yield much great data because there is so much time value (Nov. 17 expiration). But it looks like option traders are not expecting the stock to move more than $1.65 in either direction today. That would actually be a much lower percentage than what has been said to be an average 12% drop after earnings. Unfortunately AMZN has been more exposed to the bad reactions, and it just makes one wonder how many quarters the street will hit the stock. The bar is set low, and the bias may not be demanding all that much. We'll have to see what guidance the company offers, but here is their past guidance:

For Q3 revenues were projected between $2.17 billion and $2.33 billion; Operating income between $7 million and $42 million. This guidance Includes $38 million for stock-based compensation and amortization of intangible assets, and it assumes no additional intangible assets are recorded and no further revisions to stock-based compensation estimates.

For Fiscal 2006 it put revenues at $10.15 to $10.65 Billion; operating income of $310 to $440 million, including $120 million in stock and amortization of intangibles.

The company already announced a $500 million share buyback plan back on August 28. The street is not yet concerned with the IBM patent suits because AMZN was up yesterday and up again today, so they may try to put that off until they know more of the suit details.

It may boil down to how well the company manages itself going forward. There has been a call for better improvements in inventory management, an end to some of their shipping giveaways, streamlining some inventory items, how well it will do with its own download services in a music and movie digital download world, and more accountability of its merchants. Some are even concerned that Bezos is more interested in his private space ship than he is in

In truth, you can go ask a dozen critics, and you will get 12 different directions to focus on. For our concern, we are more of a down to the numbers of a now net-net profitable operating company that competes head-to-head with many brick and mortar companies to the likes of Best Buy, Wal-Mart, and others. The street has an estimate of $0.42 for 2006 on revenues of $10.35 Billion, but 2007 is expected to yield $0.70 EPS on revenues north of $12 Billion. If can show that they will actually run a leaner and meaner company with better margins than brick & mortar say by 2008 or perhaps by 2009 then some of this quarter to quarter focus may dwindle, If not, well then you can expect more and more of the same continued volatility from the true-believers fighting with the nay-sayers.

Amazon shares are up 1.3%at $33.33 ahead of earnings, up from $30.87 on the first closing day of October. After last quarter's earnings its shares fell to $26.26, down from $33.59 the day before. These shares are not used to low volatility by any stretch, so for us we want to look past the summer and look toward 2006 and 2007.

Jon C. Ogg
October 24, 2006

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