Tuesday, August 29, 2006

Calls of Note Part 3

- ThinkEquity comments on Amazon.com (NASDAQ:AMZN) after the co announced a board authorization to retire up to $500 million of common stock in the next 24 months, "through open market transactions, privately negotiated transactions or transactions structured through an investment banking institution or a combination of the foregoing." "The company may do so if it believes its shares are undervalued," Amazon's release said. What would constitute "undervalued" is unclear, but firm's analysis suggest that the retirement of $400 million of stock by year end 2007 would have no effect on the value of the shares.

Since the shares currently sell at about 40x this year's EPS of $0.74 (assuming taxes at "normal" rates, rather than the 12%-13% that the company will report under GAAP), and 28x next year's $0.96, the effect on EPS should be almost nothing. That is, for each dollar of shares repurchased, the company would incur/save about $0.03 of after-tax interest expense. Thus, for the current year (at an annual rate), retiring shares would reduce EPS by more in higher interest expense than the reduced shares would raise it. For next year, for which the firm estimates "normally taxed" EPS of $0.96, the effect on EPS would be a rounding error.

In the belief that the growth in the company's "investments" in Technology and Content will slow materially in coming quarters and that those "investments" will begin to produce a return in 2007, they continue to rate the shares ACCUMULATE; 12-month price target remains $33.

Notablecalls: So the $500 mln buyback is just makeup on a bulldog. Big surprise. Not actionable but good to know category.

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