Moody’s Maintains Investment Grade Rating on Amazon

Despite being down in Wednesday’s trading session, Amazon.com Inc. (NASDAQ: AMZN) received some positive news from the credit ratings firm Moody’s. Amazon’s outlook was changed to stable from negative by Moody’s when the firm affirmed the Baa1 senior unsecured rating.

Amazon’s Baa1 senior unsecured rating reflects its excellent liquidity and conservative financial policy relative to shareholder returns, and improving operating margins and strengthened quantitative profile despite prodigious growth-oriented spending and over $5 billion in “absorbed” shipping costs. The rating also recognizes Amazon’s dominant position as an online retailer, though Moody’s believes it is continuing to face increased competition from brick-and-mortar retailers as they morph their successful legacy physical store businesses online, as well as its leading position in cloud-based storage and other services via Amazon Web Services.

At the same time the rating reflects Moody’s expectation that this present investment cycle will continue to generate profits, and therefore improved interest coverage, for the next 12 to 18 months, as well as the expectation that Amazon will continue to maintain high cash balances during the present investment cycle. The stable outlook reflects the improvement in credit metrics over the past 12 months, with Moody’s expectation that Amazon’s operating performance will ensure that any erosion in metrics over the next 12 months due to capital spending or other financial policy decisions likely will be benign.
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Charlie O’Shea, vice president at Moody’s, commented:

The changes in the rating outlook to stable from negative recognizes the favorable impact on Amazon’s quantitative credit profile, especially interest coverage, of the significant improvement in operating margin and profitability for FYE 2015. Interest coverage has improved from sub-1 time at FYE 2014 to 3.4 times for FYE 2015, with debt/EBITDA reducing from 3.3 times to 2.1 times. Amazon continues to generate high levels of cash flow which adds to its excellent liquidity profile, with almost $20 billion in cash and marketable securities at FYE 2015 against total debt of slightly over $20 billion. Going forward, we expect Amazon to continue to gain share in online, and therefore overall, retail, with key factors driving further potential upward rating movement its financial policy and greater disclosure surrounding operating performance and strategy, as well as more consistent profitability.

Shares of Amazon were trading down 3.7% at $531.72 on Wednesday, with a consensus analyst price target of $738.13 and a 52-week trading range of $358.23 to $696.44.