Friday, January 29, 2010

Amazon beats handily, but free cash flow increase is of dubious quality (AMZN)

Amazon beat consensus earnings last night by about 15cents per share for the fourth quarter, and revenue of $9.5billion came in above the $9billion expected by the street.

Company-wide gross margin jumped .7% from a year ago to 20.8%, led by North America which jumped to 23.6% from 21.5% a year earlier. International gross margin dropped almost a percent, to 17.7%.

The analyst community, as usual with Amazon, is deliberating over how much of a premium the shares deserve to other stocks - a game that i have no idea how to play. Among analyst reactions, one guy that's not having a great morning is Hamed Khorsand of BWS financial. He upgraded the shares to STRONG BUY today. Not a BUY, but a STRONG BUY. This is coming off the SELL rating he stuck with since late July of last year. Hmmm, in (an attempted?) defense of his call, I note that he downgraded the stock back when its forward PE was about 42, and is upgrading it with the forward PE at about 36....hey i tried.


The company cited BIG operating and free cash flow, but it's important to note that a full $1billion of the company's $2.9billion in Free Cash Flow was due to extending accounts payable. More to the point, they extended it by an EXTRA billion compared to how much they pushed it out last year. I certainly won't scoff at this impressive working capital management, but it's often not sustainable to this degree, so it's best to adjust the free cash flow for investment decisions.

Copyright 2010 AlphaNinja

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