Amazon Seeks to Start Delivery Service

Newest initiative does not concern potential competitors

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Sep 28, 2016
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In an attempt to combat parcel couriers everywhere, Amazon (AMZN, Financial) is laying the groundwork for its own shipping business.

Amazon executives claim that by undertaking a delivery business, it will help with delivery capacity during the holiday season. However, current and former Amazon managers and business partners claim the retailer has grander plans than it has acknowledged.

Seeking independence from the middle man, Amazon wants to haul and deliver its own packages.

With long-standing competition from United Parcel Service (UPS, Financial), FedEx (FDX, Financial) and even the U.S. Postal Service, Amazon has its work cut out. Not only will it be competing with long-established entities, but the cost of building up a delivery network to effectively rival them will be a job in itself. Not to mention, Deutsche Post (XTER:DPW, Financial) failed in its attempt to compete in the U.S. in the 2000s. To spearhead the project, Amazon hired Uber Technologies executive Tim Collins to serve as vice president of global logistics.

UPS and FedEx executives seem unconcerned with Amazon’s initiative at this point.

“The level of global investment in facilities, sorting, aircraft, vehicles, people to replicate the service we provide or our primary competitor provides is just daunting and frankly, in our view, unrealistic,” FedEx Chief Financial Officer Alan Graf said.

UPS Chief Commercial Officer Alan Gershenhorn said his company’s network would be “very difficult to match.”

FedEx reports spending more than $5 billion every year on expansion and upgrades. UPS claims to spend more than $2.5 billion. Between the two companies, they have approximately 4,000 hubs and facilities worldwide and operate more than 1,000 planes and 200,000 vehicles.

Amazon has a head start on its initiative, as it currently delivers packages from 70 of its facilities located in 21 states. In August, Amazon revealed its first fleet of Amazon Prime Boeing airplanes for long-distance shipping. The company has reportedly purchased long-haul truck trailers.

Established in 1994 as an online bookseller, the Seattle-based company has expanded its business to sell everything from books to electronics and has evolved to offer streaming services for music and movies. In addition, it produces electronics such as the Kindle, Amazon Fire Phone and Amazon Fire TV stick.

The company has a market cap of $389.8 billion with an enterprise value of $381.5 billion. It has a price-earnings (P/E) ratio of 202.5 with a forward P/E of 62.5. Its price-book (P/B) ratio is 23.4, and its price-sales (P/S) ratio is 3.3.

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GuruFocus ranked Amazon’s financial strength 7 of 10. Its Piotroski F-Score of 6 indicates the company has a healthy financial condition. Similarly, its Altman Z-Score of 6.9 places the company in the safe zone without any risk of bankruptcy in the near future. Its Beneish M-Score implies the company does not manipulate its earnings.

The company’s return on invested capital (ROIC) is 31.9%, meaning it is earning excess returns. Companies that expect to continue generating positive excess returns on new investments will see its value increase as growth increases.

GuruFocus ranked the company’s profitability and growth 7 of 10. It has an operating margin of 3.2% and a net margin of 1.6%. Its return on equity (ROE) of 14.02% ranks higher than 73% of other companies in the global specialty retail industry. Its return on assets (ROA) of 3.2% ranks higher than 55% of companies in that industry.

Andreas Halvorsen (Trades, Portfolio) is Amazon’s largest shareholder among the gurus with over 3 million shares. He holds 0.69% of outstanding shares, which is 9.97% of his total assets managed. Frank Sands (Trades, Portfolio) and Chris Davis (Trades, Portfolio) are second and third largest. In total, 36 gurus hold positions in Amazon.

Amazon was trading at $823.46 on Wednesday. The DCF Calculator gives the stock a fair value of $43.13.

Analysts estimate Amazon could save $1.1 billion annually in shipping costs, about $3 per package, if it severed ties with UPS and FedEx. They calculated the cost to ship with either of these companies is $7.81 on average.

Disclosure: I do not own stock in any companies mentioned in the article.

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