Hero, another superbly managed company...
>>What a difference a day makes.
On Wednesday, Ravi Suria sent out a memo on Amazon.com, marking the
"sharp improvement" in the company's operating results, citing narrowing
cash losses, widening margins and a reduction in costs.
On Thursday, Ravi Suria sent out another memo on Amazon, pretty much
taking it all back.
Ravi is the convertible-bond research specialist at Lehman who last June did
a masterful job of analyzing Amazon's finances and business in a well-crafted
27-page report. The essence of that analysis, as we related at the time, was
that the company seemed incapable of generating cash flow, much less
profit, from its sales. That was likely to prove quite inconvenient in the light
of mounting debt and the growing indisposition of the markets to
accommodate more financing from the company.
For Amazon, Ravi mournfully concluded, the "party is over." And, as it
turned out, it sure was.
So when we got his relatively upbeat Wednesday comment on the company,
we decided we could do no less in the interest of fairness than offer the gist
of it here, especially since we had run a skeptical blurb on the company only
last week.
But wouldn't you know, this rare impulse toward magnanimity was nipped in
the bud by Ravi's change of heart. Rooting around in the footnotes attached
to the press release, he discovered something that got him worrying again
big-time about both Amazon's balance sheet and its income statement.
More specifically, Amazon reclassified its equity stakes in Webvan and
Sotheby's as cash and marketable securities. That shift, which might well
have gotten Abe Briloff's juices going, had two principal effects: It enlarged
the amount of cash the company could cheerfully show on its books, while
masking how bad things really were in the cash-flow department.
It also, suggests Ravi, might be of at least passing interest to the SEC, which
already is probing Amazon for the way it accounts for its dealings with its
online "partners." Indeed, the security gumshoes in Washington, as Mark
Veverka reports ("Really?"), appear to be sniffing around a number of things
Amazonian.
Ravi points out that the arguable reclassifying of the Webvan and Sotheby's
holdings had the salubrious effect of enhancing the cash trove on the
company's books by $96 million. The total was further swelled by a couple
of nonrecurring windfalls: $20 million from the sale of inventory to Toys R
Us and $57 million from its online "partners" that has not yet been
recognized as revenue. Subtract those three additions, worth altogether
$173 million, and the reported $900 million in cash items on the company's
latest quarterly balance sheet shrinks like wool in hot water.
We know where the $173 million came from, and we also know that
Amazon's operations chipped in not a penny of it. What isn't by any means
clear, however, is, as Ravi asks, where did the $173 million go? Not, by the
company's admission, into investment or financing. So what does that leave?
Well, it leaves the reasonable possibility that the tidy sum was used to meet
operating costs. If so, the implications are of no little moment. For one thing,
it would mean that Amazon's actual operating cash-flow deficit was not, as
its press release claims, $4 million, but as much as $177 million.
"Considering," Ravi comments, "that the company reported gross profits of
$167 million and an operating loss of $163 million on revenues of $638
million," $173 million is not exactly pocket change. If, indeed, the $173
million went to absorb operating costs, the apparent improvement in
operating ratios that Amazon's Street followers were quick to wax
enthusiastic about would require a very agonizing reappraisal.
It's anticlimactic, we know, but Ravi remains adamant that investors ought to
give wide berth to Amazon's converts and, we suspect, its stock as well.
Despite Ravi's second thoughts and stern strictures, Amazon finished up five
points on Thursday. It just may have had something to do with the revelation
that short interest leaped three million shares, to 35.4 million shares. Maybe
we're naive, but aren't bears covered by statutes against cruelty to animals? << |
