Is there any stopping Amazon (Nasdaq: AMZN) and its dominance of the online retail trend?

In October, the online e-tailing megalith blew past first quarter estimates to report sales growth of 23% over the same period last year. Amazon captured 36% of all retail growth volume in North America for the year through September and is expecting a very merry holiday shopping season.

The company just hired 100,000 seasonal workers in addition to 25,000 new full-time staff. As traditional retailers like Wal-Mart (NYSE: WMT) warn investors of sluggish brick-and-mortar sales, online retail is surging.  

Forrester Research estimates that U.S. online retail sales will reach $334 billion this year, growth of 9% from last year, and could grow to $480 billion by 2019. More than half (57%) of Americans bought something online over the last year and e-commerce accounts for 12.7% of total retail.

Expected growth in online retail is more than double the 3.7% growth expected at brick-and-mortar stores according to the National Retail Federation.

There’s no doubt that Amazon is crushing the retailing competition and will play a very big role in the future of shopping but the short-term risks are just as glaring. Shares have doubled over the last year but have also plunged on two separate occasions, losing 13.5% in less than a week in August and losing 9.5% in just over a week in September. Even on analyst expectations of an earnings explosion to $5.26 per share in 2016, more than 195% above 2015 expected earnings of $1.85, the shares would still be priced at 115 times earnings.

Is there another way to profit from Amazon’s success without taking a position in one of the most expensive companies in the market?

Yes.

Ride Amazon’s Coattails Without The Price Tag
Investors can get exposure to the unstoppable online retailing trend through ancillary companies in payment processing and delivery.

Package carriers like FedEx (NYSE: FDX) and United Parcel Service (NYSE: UPS) are the most obvious beneficiaries. Shares of FedEx trade for just 17 times trailing earnings, a discount to the multiple of 21 times earnings on UPS and below its own five-year average of 20 times trailing earnings. FedEx has steadily gained market share in the ground delivery segment since 2000.

FedEx recently announced a hiring surge of 55,000 as it expects to ship a record 317 million packages between Black Friday and Christmas Eve, a 12% increase in volume from last year. Not only will FedEx get a boost from a strong holiday season, the delivery company has announced that it will increase rates by an average of 4.9% for most services starting January 4 of next year.

It’s the same increase as last year but the company has upped its operating margin by 1.1% over 2014 and expects another 1% increase in profitability through 2016. FedEx is targeting $1.6 billion in annual profit improvements through 2016 on technology upgrades, sourcing improvements and a fleet modernization. Earnings for the December through February quarter are reported in March and follow an 8% upside surprise in EPS last year.

Credit card giants Mastercard (NYSE: MA) and Visa (NYSE: V) are both looking relatively pricey at 30 times trailing earnings, especially against smaller rival American Express (NYSE: AXP) and its multiple of 14 times trailing earnings.

Shares of Amex have been rocked this year, falling 20% since January, on the loss of a co-branding partnership with Costco (Nasdaq: COST) that will end in March 2016. Despite the negative sentiment on the news, most of the company’s purchase volume (70%) is done on non-cobranded cards and Amex has accelerated negotiations with other partners to support certainty around other deals.

In March, Amex was notified that the Federal Reserve did not object to the company’s plan to repurchase up to $6.6 billion in shares through the second quarter of 2016. The company announced a new plan in May to repurchase up to 150 million shares, about 15% of the market cap, and an increase of 12% in the quarterly dividend.

Full year earnings are expected to fall by 2.2% to $5.27 per share but management has guided to positive growth next year and up to 15% EPS growth in 2017. Operating expenses were down 4% in the first half of 2015 and greater profitability, combined with stronger retail sales, could drive a surprise upside on earnings. As both an issuer of cards and a merchant transaction processor, the company has a unique advantage in its consumer spending data that makes it a very competitive player in the credit space.

Risks To Consider: While the potential for a strong holiday season could send these stocks higher, they are cyclically-sensitive and any economic weakness after the holidays could bring prices back down.

Action To Take: Benefit from the boom in online retailing and Amazon’s good fortune to build a position in secondary beneficiaries of the trend to online shopping. I especially like the opportunities presented by FedEx (NYSE: FDX) and American Express (NYSE: AXP).

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