Here's a SmartMoney.com article ( 12/98) on Borders:
December 11, 1998
Are Bookstores Really Dead?
By Karyn McCormack
BORDERS GROUP (BGP). WALL STREET is crawling with mathematicians trying to unlock the mysteries of the stock market by using supercharged computers and modern chaos theory. But grizzled trading desk veterans know that a rough version of a simpler law of physics is often at work, namely, "For every action, there is an equal and opposite reaction."
Consider the case of Amazon.com (AMZN) and Borders Group (BGP).
Over the past year, Internet darling Amazon.com has soared more than 600% as investors stampede to the notion that Web commerce is the way of the future. Borders, meanwhile, has lost more than 30% of its value over the same period. The thinking here is not complex: If Amazon is going to win, someone else has got to lose. And Borders -- a laggard when it comes to selling books in cyberspace -- is the most likely candidate.
To us, it sounds distinctly like the noise that roiled the media and entertainment stocks earlier this decade. First cable TV was going to kill the networks, then the telephone companies were going to murder cable, then the Internet was going to off them all. So why is Time Warner (TWX) -- which was once reviled for both its cable and network exposure -- soaring along so nicely this year? Because strong assets are strong assets whether they're cutting edge or not. And after every period of hype, investors eventually rediscover that profits are what really drive stock prices, not technological promises.
That's why Borders caught our eye when it turned up on the SmartMoney Retail Industry Screen this week. We've got nothing against Amazon; as Web publishers, we believe strongly in the future of e-commerce. But that doesn't mean people are going to stop going to bookstores and even if they do it will take a long time.
"Borders stock has acted poorly because of the perception that nobody will ever walk into a book store again, and that the Internet will take over the world," says analyst Donald Trott at Brown Brothers Harriman & Co. Never mind that analysts project Borders earnings to jump 25% annually for the next three to five years while Amazon's losses are expected to grow substantially.
Of course, fighting the tape is a difficult game, but at just 14.9 times projected earnings for next year, Borders is probably selling cheap enough to buy and hold for awhile. The stock is selling at a 35% discount to its growth rate, while Trott's index of 25 retailers is selling at a 36% premium to growth. Borders' rival Barnes & Noble (BKS), meanwhile, commands a multiple of 25 times projections, despite its 24% expected annual earnings growth. BKS shares have also been held back by Amazon fever, but investors value Barnes & Noble more highly than Borders because of its more extensive Internet strategy.
It is true that Borders earnings are slowing somewhat from the 40% growth posted last year and the 62.7% scored in 1996. And until '98, Borders was beating analysts' estimates by a penny every quarter following its June 1995 spin-off from Kmart (KMT), says Trott. Now that it merely meets the Street's forecasts, the stock is less attractive to the momentum investing crowd.
Last quarter, the company posted a loss of a penny a share because it opened four stores ahead of schedule. Expenses also rose to upgrade the company's computers for the Year 2000, launch its Web site (yes, it does have one) and expand overseas. Investors were also disappointed that sales growth at its superstores slowed, mainly because of software and mechanical problems at a new distribution plant, which have since been resolved.
Still, almost every analyst who follows it rates Borders a Buy because of its usual earnings stability. Unlike Barnes & Noble, Borders is not spending aggressively on its Internet site, analysts say. Instead it is focusing on expanding overseas, where there is little competition. In October 1997, the company acquired Books etc., a London-based operator of 23 small book stores. Since then, Borders opened superstores in the United Kingdom, Australia and Singapore. Next year, the company plans to open five to 10 stores in English-speaking countries overseas. "This will be a bigger part of the picture next year," says analyst David Magee of Robinson-Humphrey, a Wall Street Journal All-Star. "Books are poorly marketed and expensive overseas," agrees Danielle Fox at J.P. Morgan. "This is a good opportunity [for Borders] to offer a wide variety of books with selective discounting."
The Street is also excited about Borders' new CEO, Philip Pfeffer, a seasoned publishing executive hired last month. Pfeffer was president of Random House and ran Ingram Book Group's distribution division, the world's largest book distributor. "He is considered an industry icon -- he is one of the most respected executives in the book world," Trott says.
It's unlikely Borders will fully escape the shadow of Amazon anytime soon. But Magee thinks the hype will subside in the coming year. "The Internet fever will break," he predicts. "Next year, retail e-commerce will not be as exciting news anymore." If Borders' new CEO can iron out the kinks by then, this stock may be poised for a rebound. "Borders does not have much sizzle," Trott says, "but it has both the superior absolute per-share earnings and the greater continuity of earnings growth." And history shows, that usually spells value. |
