Analysts Talk Credit Crunch at Amazon

The fate of e-commerce bellwether Amazon.com's (AMZN) now lies in the hands of credit managers at the thousands of companies that sell their goods to the Internet retailer.

That was a rare point of agreement among analysts and investors gathering Wednesday in New York for a forum on Amazon's finances. The forum was the fifth in a series of such talks on Amazon hosted by the New York Society of Security Analysts.

The conference, part of a feverish debate among Wall Streeters over whether Amazon can survive as a company, took place as rumors circulated on Wall Street on Wednesday that the company was near bankruptcy. Amazon, which flatly denied the rumors and maintains it will become profitable on a limited basis by the end of this year, saw its shares drop $1.57, or 13%, to $10.19.

"The issue here is whether the company can establish profitability on a sustainable basis before it runs out of cash," said Gary Lutin, head of investment bank Lutin & Co. and chairman of the forum.

Bears

One view presented at the forum suggested it may not. An analysis of Amazon's financial statements using a well-known formula for judging creditworthiness suggests a high probability of bankruptcy, according to results unveiled at the forum.

Running Dry Amazon shares still falling

Lance Ettus, an analyst at Value Line who presented the findings, plugged Amazon's own projections and those of Merrill Lynch analyst and Amazon bull Henry Blodget into the formula. The formula, known as the Altman Z score, is an esoteric method developed by a New York University professor that Ettus described as the "most well-known and widely used" way to gauge creditworthiness. The aim was to predict whether credit managers at companies that supply goods to Amazon will continue to supply credit on favorable terms, which is key if Amazon is to remain in business and become profitable.

"According to this analysis, they would likely pull credit," Ettus said. "This would tell a credit manger to cut credit. Unless, of course, Amazon can get more financing."

Amazon was invited to send a representative to the forum, but declined. "We have already given our financial guidance for the first quarter and the year," said Bill Curry, Amazon spokesperson. He said it would be "inappropriate" for the company to discuss financial data between quarterly earnings announcements.

It is widely agreed among analysts that most sources of funding, such as the capital markets and bank loans, are likely to be off-limits to Amazon. The company has stated it expects to achieve profitability on a limited basis by the fourth quarter of 2001 without raising extra money. Curry emphasized that the company projects it will have plenty of money -- about $900 million by the end of the year.

Siding With Suria?

The analysis appears to validate a highly publicized report by Lehman Brothers debt analyst Ravi Suria that predicted a "creditor squeeze" in the second half of 2001. The report intensified the already heated debate on Wall Street over Amazon's finances. Amazon called the report "silly and chock full of errors," while Merrill Lynch's Blodget took the unusual step of releasing his own report backing the company's cash position.

Suria's report cautioned that the company's working capital -- its current assets minus liabilities -- was about $386 million at the end of the fourth quarter, much less than the $1.1 billion in cash and marketable securities the company claims will allow it to pay its bills and become profitable. This erupted into a debate over which metric is appropriate, cash or working capital, when gauging the health of the Amazon's balance sheet.

At the forum, Michael Glick, director of corporate credit at ratings agency CreditRiskMonitor.com, sided with Suria. "Credit managers look at working capital," he said. "Cash is just a piece of the balance sheet. Working capital is how they pay the bills."

Holly Gustafson, an analyst at Legg Mason who spoke at the conference, praised Amazon's business model and said she believed the company is in a solid cash position. Even though the company still bleeds money, she blamed much of Amazon's failings on the swoon in stock prices for Internet companies.

"All of a sudden dot-com land changed abruptly, and now we need to look at the bottom line," she said. "Profitability is important. I think they're taking the necessary steps they need to." Those steps include recent layoffs and plans to stop selling unprofitable items. (Gustafson has a buy on Amazon and her firm does not have an underwriting relationship with the company.)

Tightening?

While Amazon has been controversial for many months on the Street over how it reports its finances, the No. 1 question facing analysts and investors now is whether the company will have enough money to pay its bills. The concern is that companies that supply Amazon will tighten credit terms, or worse, halt shipments.

Representatives at several of Amazon's largest suppliers, who spoke on the condition of anonymity, told TheStreet.com that they had neither stopped shipping to the company nor tightened credit terms, although they say, of course, that they will be watching the situation closely.

Jerry Flum, chairman and chief executive of CreditRiskMonitor.com, said suppliers are "taking a watch-and-wait position." In the bricks-and-mortar world of retailing, suppliers are reluctant to completely stop shipments, for fear they will be shut out once an insolvent company emerges from bankruptcy. He said a credit manager will "lower his exposure as he's beginning to detect problems," rather than abruptly halting shipments at the first sign of trouble.

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