| Amazon.com (AMZN) 14 7/8 + 7/16: Does it really surprise anyone that Lehman's VP of Convertible Debt Strategy is recommending avoiding Amazon.com debt? How can this come as a surprise? AMZN's 4.75% convertibles due to mature in 2009 are low-grade junk bonds trading at about $0.45 to the dollar. They are convertible into AMZN common shares at about $78. They carry a CCC+ rating at S&P and a Caa3 rating from Moody's. Amazon.com Spokesman, Bill Curry called the report "silly" and "chock full of errors" pointing at Amazon's $1.1 bln cash and marketable securities balance. The author of the report, Ravi Suria is indeed correct in his assertion that AMZN's current liabilities have grown much faster than current assets. He goes on to explain that the company's working capital, defined as current assets minus current liabilities, is the key relevant liquidity measure because the cash line can be manipulated through stretched payables, unpaid expenses and reduced inventory levels. Suria contends that the company could face a creditor squeeze if their working capital continues to deteriorate. Suppliers of the books, CDs, etc. that Amazon.com buys from could become nervous when the company's working capital turns negative (current liabilities > current assets) in 2001, as Suria expects it to, and demand faster payment. There are a couple things we'd like to point out about the left side of AMZN's balance sheet. First off, a negative working capital balance is not a disaster, it's not even necessarily a bad thing. For a seasonal retailer, revolving loans are a necessary part of doing business and in weak quarters, they will rely on their credit arrangements. Secondly, because of the instantaneous payments that the Internet facilitates, the firm has no accounts receivable. That reduces working capital. Additionally, although the company has built some major warehouses, one of the key tenets to the business model involves keeping inventories low, and Amazon has been successful there (relative to revenue growth). That also reduces working capital. If inventories ballooned and accounts receivable skyrocketed, assuming current liabilities stayed the same (for illustration purposes), the working capital number would be higher...however, the stock would get killed and all the analysts would jump ship because the company wouldn't be managing their assets effectively. Amazon.com is not a traditional retailer, and for that reason, it's tricky to apply traditional retail operating metrics and standards to the company's financials. We're not defending AMZN, and we're not refuting anything in Suria's report, it's all valid, but there isn't anything new here. - Matt Gould, Briefing.com |
