Lehman says avoid Amazon.com bonds, sees less cash
biz.yahoo.com
Thursday October 26, 7:02 pm Eastern Time
By Jonathan Stempel
NEW YORK, Oct 26 (Reuters) - Lehman Brothers again warned investors on Thursday to ``avoid'' buying Amazon.com Inc.'s (NasdaqNM:AMZN - news) convertible bonds because the Internet retailer's cash level is even lower than recently thought.
Having already warned that Amazon.com faces a potential cash squeeze from its vendors, Lehman said, ``We strongly reiterate that investors avoid the company's convertibles.''
Lehman issued its new warning just two days after Seattle-based Amazon.com surprised Wall Street by saying it lost less and sold more than expected in its third quarter.
For investors, Lehman's warnings suggest that Amazon.com's stock may not rise enough to make the bonds worth buying. A convertible bond is a hybrid security that usually offers current income, and can be converted into company stock. Its fortune is closely tied to the underlying stock price.
In Thursday's report, Lehman said Amazon.com, in a footnote to its earnings press release, reclassified $96 million of equity investments as ``cash and marketable securities.''
That reclassification, Lehman said, left Seattle-based Amazon.com's ``operating'' cash balance about $173 million below the $900 million the company reported, after accounting for one-time gains of about $77 million.
``Where did the $173 million go?'' Lehman asked. ``The cash number (which is usually the most inviolate of the numbers on the income statement, balance sheet or cash flow statement) does not fully represent 'cold hard cash.' This significantly increases our worries about the balance sheet.''
Patty Smith, a spokeswoman for Amazon.com, which ordinarily does not discuss analysts' research reports, said, ``The fact is, we have $900 million of cash and marketable securities, and that is cash from operations.''
Jeetil Patel, an equities analyst with Deutsche Banc Alex. Brown, said Amazon.com's ``business is improving and it looks pretty solid,'' and called Lehman's concerns a matter between it and the company.
Amazon.com's stock closed on Thursday at $36-7/8, up $5, or 15.7 percent, on Nasdaq volume of 17.7 million shares, after rising $2-5/16 on Wednesday. The two-day rise totals nearly 25 percent, although Amazon.com's shares remain far below their $113 record high, set last December.
NEW REPORT
The new report was authored by three analysts led by Ravi Suria, Lehman's vice president of convertibles strategy and the author or co-author of the two prior reports.
The June report, which warned Amazon.com could run out of money by the middle of 2001, helped trigger a 19 percent one-day slide in Amazon.com's share price.
In the new report, Lehman said a footnote attached to Amazon.com's Tuesday press release reclassified the company's equity investments in San Francisco-based online grocer Webvan Group Inc. (NasdaqNM:WBVN - news) and New York-based auction house Sotheby's Holdings Inc. (NYSE:BID - news) as cash and marketable securities.
Lehman wrote that Amazon.com has classified equity securities in this manner before, but the amounts were smaller.
The $173 million, Lehman wrote, came from the equity classification, $20 million from a sale of inventory to Toys 'R' Us Inc. (NYSE:TOY - news), and $57 million from Amazon Commerce Network (ACN) partners that it has not recognised as revenue.
Lehman said the money ``did not go into investing or financing'' and ``quite possibly went into operations -- which means that the negative operating cash flow was possibly $173 million greater than the $4 million the company reported.''
Smith said Amazon.com has the ability to convert the $96 million to cash, and that a majority of its recent ACN agreements have been for cash.
Lehman said it is also awaiting the outcome of an Securities and Exchange Commission investigation into accounting matters relating to the ACN. Amazon.com Chief Executive Jeff Bezos told CNBC on Wednesday ``we are very confident that the accounting disclosure is correct.''
Amazon.com has said it expects to have $1 billion of cash at the end of the year and $700 million at the end of March. Lehman said in its report issued Wednesday it did not have confidence in the latter number.
AMAZON.COM'S CONVERTIBLE BONDS
In January 1999, Amazon.com sold $1.25 billion of the 4.75 percent convertible bonds maturing in 2009. In February 2000 it sold 690 million euros (then worth about $681 million) of 6.875 percent convertible bonds maturing in 2010. The company has also sold high-yield, or junk, bonds.
Credit rating agency Standard & Poor's rates Amazon.com's convertible bonds ``CCC-plus.'' Another agency, Moody's Investors Service, rates them ``Caa3,'' roughly two notches lower. Both grades are considered low junk grades. |
