Hopefully on Monday I can get SSB to send me the actual
formulas and model they used to come up with this.
-------------------------------------------------------
Amazon.com (AMZN)
AMZN: Cash Flow Projections, Amazon To End 1H (Buy, High Risk)
March '01 With $666 Million... Mkt Cap: $13,026.9 mil.
July 13, 2000 SUMMARY
* Seeing much disinformation surrounding Amazon's future
INTERNET - cash flows, we decided to publish our projections; we
E-COMMERCE believe that Amazon will end the March Quarter '01 with
Tim Albright $666 million, and March '02 with $757 million in cash.
* We have stress-tested our model for for two scenarios ,
a 20% decrease in inventory turns coupled with 20%
Bruce van Raalte increase in payables turns off of our base case scenario,
and a 20% decrease in '01 sales off of our base case of
$4.9 bn.
* In the negative inventory turns / payables turns
scenario Amazon ends Q1 '01 with $601 million in cash and
March '02 with $553 million in cash. With the sales
slowdown scenario, Amazon ends March '01 with $861 mm and
March '02 with $620 million.
* We will make available our cash flow projections,
complete with formulas, to any Salomon Smith Barney
client. Please contact your salesperson.
* Reiterating our Buy (1H) rating. Q's 3 and 4 will be good
for AMZN.
FUNDAMENTALS
P/E (12/00E) NA
P/E (12/01E) NA
TEV/EBITDA (12/00E) NA
TEV/EBITDA (12/01E) NA
Book Value/Share (12/00E) NA
Price/Book Value NA
Dividend/Yield (12/00E) NA/NA
Revenue (12/00E) $2,996.0 mil.
Proj. Long-Term EPS Growth 60%
ROE (12/00E) NA
Long-Term Debt to Capital(a) NA
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (6/28/00) $37.88 Current Rating 1H
52-Week Range $106.69-$33.88 Prior Rating 1H
Shares Outstanding(a) 343.9 mil. Current Target Price $130.00
Convertible No Previous Target Price $130.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/99A Actual ($0.12)A ($0.26)A ($0.26)A ($0.55)A ($1.19)A
12/00E Current ($0.35)A ($0.32)E ($0.28)E ($0.22)E ($1.17)E
Previous ($0.35)A ($0.32)E ($0.28)E ($0.22)E ($1.17)E
12/01E Current NA NA NA NA ($0.48)E
Previous NA NA NA NA ($0.48)E
12/02E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/00E ($1.28); 12/01E ($0.59); 12/02E NA
OPINION
Much has been made of Amazon's cash position in recent weeks. Although Amazon
ended the March '00 quarter with more than $1 billion in cash some have
speculated that the company will run out of money by the end of March '01.
Certainly analysis of Amazon's last two quarters will not lead to pretty
conclusions. However no one would dare come to an investment conclusion
without looking at the range of outcomes from Amazon's operations and
understanding the impact that they have on Amazon's cash balance. We've spent
some time going over our cash flow projections and we believe that Amazon
will end the March '01 quarter with $666 million in cash and $757 million in
March '02, a far cry from running out of money. Even when we stress test the
model with slower inventory turns and faster payables turns, or with
significantly lighter revenue, we still come out with more than $500 million
in cash at the end of the March Quarters in both '01 and '02. We are making
available our cash flow model, complete with formulas, to all Salomon Smith
Barney clients. Please contact your sales person.
Cash Flow Projection Methodology
In order to determine the sensitivity of cash flows to changes in working
capital, we have constructed a simplified cash flow statement. We arrive at
operating cash flows by adding depreciation and other non-cash items and the
change in operating assets and liabilities to net income. The other non-cash
items in our projections are primarily goodwill amortization. Changes in our
inventory and accounts payable projections are reflected in the change in
operating assets and liabilities. Deducting capital expenditures from
operating cash flow we arrive at free cash flow.
Assumptions
We have projected that Amazon will have revenues of $2.98 billion in 2000,
and $4.9 billion in 2001. We have projected capital expenditures of $200
million in 2000 and $225 million in 2001. For depreciation, our projections
are $113 million and $183 million for 2000 and 2001 respectively. Our
projection for other non-cash items, which incorporates approximately $440
million of annual goodwill amortization, are $847 million and $840 million in
2000 and 2001, up from $362 million in 1999. In our assumptions regarding
changes in operating assets and liabilities, we held interest payable
constant, since we do not expect the company to accumulate more debt. The
current portion of LTD is based on the maturity schedule of capital leases.
We expect the other operating assets and liabilities, outside of inventories
and payables, to grow in proportion to sales.
Inventory: We drive our inventory projections off of anticipated inventory
turns that are built off of a combination of recent historical levels and the
turns rate of bricks'n'mortar competitors. We are projecting Amazon's
inventory turns to range between 3.2x in the December quarter and 2.7x in the
March quarter, following the recent 4.0 in Dec. 99 and 2.9x in March '00.
Leading Consumer Electronics' retailer Best Buy's inventory turns range
between 2.6x in the December quarter and 2.2x in the March quarter. Leading
Book retailer Barnes & Nobles' inventory turns range between 1.1x in the
December quarter and 0.8x in the March quarter. We expect inventory turnover
to decline in the September and December quarters and to increase in the
March and June quarters. We projected inventory based on using sales-based
turnover.
Accounts Payable: We drive payables off of our payables turns data, using
COGs as the turns-driving line. We expect payables to follow a similar
pattern to inventory: building to a peak in December and reaching their
lowest levels in the March quarter. We are projecting Amazon's payables turns
to range between 1.6x in the December quarter and 1.3x in the March quarter,
following the recent 1.7x in Dec. 99 and 1.2x in March '00. Leading Consumer
Electronics' retailer Best Buy's inventory turns range between 2.6x in the
December quarter and 2.5x in the March quarter. Leading Book retailer Barnes
& Nobles' inventory turns range between 2.0x and 1.2x.
Scenarios
Base Case:
In our projections, we have assumed a gradual improvements in inventory
turnover as the company's fulfillment operations become more efficient. We
have assumed that payables turnover will be consistent with historical
levels. We have accounted for continued strong seasonality, despite the fact
that Amazon is diversifying into counterseasonal merchandise. The result of
our assumptions is that Amazon remains clearly adequately funded. We expect
the company to finish Q1 2001 with approximately $667 million in cash and Q1
2002 with $757 million in cash, losing $342 million in the March to March
time frame of 2000 - 2001, and generating a positive cash flow during the
2001- 2002 March to March time frame of $93 million.
Bad Case 1 - Reduction in inventory turnover and increase in payables
turnover:
In order to test the robustness of the model, we reduced our inventory
turnover by 20% and increased our payables turnover by 20% while keeping all
else equal. In this case Amazon ends March 2001 with $602 million and March
'02 with $554 million, losing $407 million and $48 million in respective
years.
Bad Case 2 - Reduction sales and increase in losses:
We tested an alternate scenario, reducing projected revenues by 20%+ and
increasing losses by $90 million, while keeping all else equal with the base
case scenario including inventory and payables turns. In this scenario, AMZN
finished 2000 with over $861 million of cash in March '01 and $620 million in
March '02, generating cash flow losses of $148 million and $241 million
respectively
Conclusion
Clearly we believe the concerns over Amazon's bankruptcy are overstated. Just
like we cringed when we saw Jeff Bezos named as Time's "Man Of The Year" in
January (one of the all-time great sell signals) we were relieved at
BusinessWeek's recent cover page story on Amazon questioning its viability
(buy signal). Amazon is not going to run out of money within the next year or
the next ten years. Our sense is that we will look back and view these past
several weeks as one of the great buying opportunities in the stock. The
biggest risk in the story exists in Amazon's June quarter results. While we
are not going to hazard a gun-slinger guesstimate on the quarter, we sense
that our $610 million revenue estimate may be a stretch, but that the company
should show an upside surprise on the spending lines (we are estimating an
EPS loss of $0.32.). Should the company show sequential growth on the top
line (against $574 last quarter) and upside against the EPS line we'd expect
the stock to move back up into the high $40's to mid $50's by the end of Q3.
We reiterate our Buy (1H) rating, comfortable with Amazon's cash position and
thrilled with its competitive position. |
