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Updated Sunday, February 3, 2013 at 12:56 PM

Amazon stock is pricey, no matter how you slice it

Seattle Times business staff

Amazon.com announced its fourth-quarter results last week, which presented another occasion for public wonderment about how its slender profit margins square with its lofty stock price.

Amazon, in fact, has by far the highest price-earnings ratio among Standard & Poor’s 500 companies: 737.5 as of the close of trading Thursday. (Netflix, with a P/E of 569.8, is the only company that’s even close; the median P/E for the S&P 500 is 17.)

Slate columnist Matthew Yglesias concluded that “Amazon, as best I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers.”

But just how unusual is Amazon’s market valuation? The answer says as much about how Amazon is run as it does about how investors analyze companies.

First off, the traditional definition of P/E — stock price divided by the last 12 months’ earnings per share — leaves something to be desired. Stock, after all, represents a claim on the company’s future profits, not anything it earned before you bought in.

Recalculating Amazon’s P/E with estimated earnings over the next 12 months produces a ratio of 171.2 — still the highest in the S&P, but less outlandishly so. (Five other companies also have forward P/E above 100.)

But Amazon CEO Jeff Bezos has long made it clear that he doesn’t think much of the standard definition of profit as a measuring stick for his company. Amazon’s goal, he says, is to grow free cash flow — basically cash from operations less investment in property, plant and equipment — per share.

That’s a key distinction. While cash flow isn’t impossible to manipulate, it’s a much more solid thing than net earnings, which are built upon layers of accounting estimates and assumptions. As the old Wall Street saw says: “Earnings are an opinion; cash is a fact.”

As it happens, Amazon’s free cash flow has declined each year since 2009, mainly due to sharply rising capital expenditures. Last year it reported just $395 million in free cash flow, in no small measure because the company spent $1.4 billion on property in Seattle’s South Lake Union and Denny Triangle neighborhoods.

So how does Amazon stack up in terms of free cash-flow-based valuations?

It ranks fourth in the S&P 500 in its ratio of price to free cash flow, at 308.8, though far behind the No. 1 company, highflying commodities giant Archer-Daniels Midland, with a P/FCF ratio of 6,379.

Another way to look at a company is through its enterprise value, which factors in outstanding debt, cash on hand and other factors. Enterprise value recognizes that, in order to have full claim on a company’s cash flows, buying all the stock isn’t enough: You have to pay off the creditors too.

Amazon’s forward enterprise multiple (enterprise value divided by the estimated pretax income for the current fiscal year) is 24.1, eighth highest in the S&P. And its enterprise value to free cash flow ratio, at 266.5, is fifth highest in the index.

So even by its preferred measures, Amazon is a pricey stock. That lofty price represents investors’ hopes that someday, the company will begin sharing its cash with them.

Drew DeSilver: ddesilver@seattletimes.com

State tops in FDIC bank settlements

Washington state has the dubious distinction of leading the pack in federal settlements against the leaders of failed banks.

The Federal Deposit Insurance Corp. has filed more than 45 lawsuits nationwide against former bank officers and directors and settled two involving Washington community banks.

Most of those negligence cases, however, have been settled for peanuts:

• In 2011, the FDIC sued execs of failed First National Bank of Nevada, claiming the agency lost $193 million. The FDIC collected $10 million from an insurer and $3.5 million from the bank’s founder.

• Also in 2011, the FDIC settled with the former leaders of Illinois’ Corn Belt Bank & Trust, whose failure cost it $84.4 million.

• It got $3.15 million in settling a $19.5 million suit against execs at Heritage Community Bank in Illinois.

• In Washington, the FDIC in November accepted $1.7 million from the insurer for Westsound Bank. The agency had sought at least $15 million; its most recent loss estimate from the Bremerton bank’s failure: $92.1 million.

• In the case of Bank of Clark County in Vancouver, Wash., which failed in 2009, the FDIC intervened in a shareholder lawsuit against the bank brought by Spokane-based Sterling Savings Bank. The FDIC sought $19.8 million in losses but settled in December for $1.5 million.

And who can forget Washington Mutual? Under a 2011 settlement, three of the thrift’s executives paid the FDIC $425,000 in cash and gave up $24.7 million in claims against WaMu, while the bank’s insurers paid the FDIC $39.6 million.

The FDIC says it’s legally obligated to maximize returns to its bank receiverships. The outlier in this pattern? IndyMac. In December, a California jury awarded the FDIC a $168.8 million verdict against three former bank officers.

— Sanjay Bhatt: sbhatt@seattletimes.com
Comments? Rami Grunbaum: 206-464-8541 or rgrunbaum@seattetimes.com


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