A few months back, Amazon (
AMZN
), which competes with eBay (
EBAY
), Wal-Mart (
WMT
), Overstock (
OSTK
), and Blue Nile (
NILE
), announced that its working capital management continues to
do well. Amazon has been able to maintain its inventory days, while
its Account Payable Days has continuously been increasing in the
past. In other words, Amazon has been able to convert its
merchandise listings to sales quickly while at the same time it has
been able to bargain better with its suppliers on the payment terms
of the goods.
We believe that the working capital management is important for
the company and Amazon's stock could continue to benefit from this
operational efficiency. Currently, we have a
$182 Trefis price estimate for Amazon stock
, which is about 2% below the current market price.
Amazon 's bargaining power with suppliers keeps payables
low
Amazon has continuously been able to apply the bargaining power
with suppliers in the past. In its case, the suppliers are
typically the retailers and the third party sellers who supply
goods to be sold through Amazon's website.
Account payable days is an important parameter to gauge
company's control over its suppliers and vendors. This parameter
has continuously increased for the company over the past years
from 57 days in 2007 to 68 days in 2009. The company recently
announced that the same parameter has further increased to 73 days.
The company has also been able to maintain its inventory days at
around 30 days. This means that the company is able to quickly
convert the merchandise inventories to sales, thereby saving on the
inventory storage cost.
Negative net working capital an advantage of
Amazon's
Amazon's excellent working capital management can be seen from
the parameter net working capital % of revenues. This parameter has
continuously improved from -11% in 2006 to -16% in 2009 and is a
sensitive driver for Amazon stock. For most companies, negative net
working capital means that the company does not have the current
assets to pay for its liabilities and that liabilities could be
increasing - in other words a bad thing. However in Amazon's case,
its business model allows it sell products quickly before it has
often paid the supplier. Essentially its suppliers are extending
financing to Amazon.
We estimate that this parameter could be around -13% for 2010
and could remain at that level over the Trefis forecast period.
However, if Amazon's net working capital management continues to do
well, there could be upside to its stock. There could be an upside
of $24 (13%) to the
$182 Trefis price estimate for Amazon stock
if net working capital % of revenues is maintained at 2009 levels
of 16% over the Trefis forecast period.
You can see the complete $182 Trefis Price
estimate for Amazon's stock here
.
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