Company : Amazon
Part 3 (1 page): Comparables
Identify between 2 and 5 comparables; explain why the businesses are similar and discuss any potential differences. Do these businesses sell substitute products? Do they target the same customer base? Have their success/risks been similar over the recent period? Is their size comparable? Compare profitability and debt ratios with comparables. Explain whether the comparables indicate that the firm is doing well or poorly, and whether it may make certain choice that improve its performance.
If your comparables differ on nearly all ratios, this may be a sign that you are not using the right comparables! Be creative to find comparables: look at products on 10-K, annual report or company website, and look for similar products by public firms. Find the industry of the firm, and look for public companies in the same industry traded in NYSE or NASDAQ. Look at financial websites such as google or yahoo finance. In the special case of conglomerates with multiple segments, it may not be possible to find a comparable with either the same segments or with the same relative sizes of segments. In that case, you may want to find one comparable for each individual segments and weight each comparable as a function of the relative size of the segment (only use largest segments 20% of sales).
Part 4 (1 page): Capital structure
Discuss the financial structure of the firm: how much debt relative to equity is the company using?
What is, in your opinion, the optimal amount of debt that the company should use? In certain cases, for example, a company may be very close to being non-investment grade (check its debt rating) and be at risk of losing its investment grade status; or it may be more highly levered than its peers or relative to its free cash flows or cash flow from operations. These may indicate situations in which the company may be better-off reducing leverage.
In other cases, a company may have very favorable credit ratios which may indicate under-utilization of debt. Consider whether the company is in a position to borrow more without severely hurting its debt rating? Compare ratios in lecture 3 and evaluate how much extra debt the company may use. You may want to reconnect your recommendation about debt capacity to your forecasted business plan for the next 5 to 10 years – will the company have enough cash on hand to pay the extra debt?
Is the company growing? If it is growing, evaluate how much capital it will need and discuss a financing plan (which may include equity). If the company is not growing or is mature, examine how much cash it is generating and discuss its planned uses of cash? How much of it should it invest, how much should it return to shareholders in dividends or share repurchase?
