To: Mani Ahmadi who started this subject
From: albert kovalyov Thursday, December 14, 2000 7:23 PM ET
Reply # of 22886
00:36am EST 14-Dec-00 Merrill Lynch (J.Osha (1) 415 676-3510) AMD ADVANCED MICRO:If execution holds, this is interesting
ACCUMULATE Long Term: BUY
Reason for Report: Company Update
Investment Highlights:
o We hosted AMD's new chief financial officer Bob Rivet for a day of meetings earlier this week. Bob brings 24 years of experience at Motorola to his new post at AMD.
o Despite the fact that AMD is being hurt by the slowdown in the PC market, we think that the company's positioning in the low end of the PC market is compelling.
o We reiterate our intermediate-term Accumulate and long-term Buy ratings - our 12-18 month price objective is $50.
Fundamental Highlights:
o AMD's product lineup continues to compare well to Intel's - we believe that the AMD Duron should be able to gain market share from Intel's Celeron in the first half of 2001.
o The biggest danger that AMD management faces in the coming year is overextending. We'd like to see the company focus more on beating Intel in the low end of the PC market, and less on engaging Intel in the corporate desktop
and server markets.
Price: $16.75
Estimates (Dec) 1999A 2000E 2001E
EPS d$1.10 $2.34 $2.66
P/E: NM 7.3x 6.3x
EPS Change (YoY): NM 13.7%
Consensus EPS: $2.37 $2.05
(First Call: 12-Dec-2000)
Q4 EPS (Dec): d$0.36 $0.52
Cash Flow/Share: $1.45 $4.14 $4.48
Price/Cash Flow: 11.7x 4.0x 3.7x
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: C-2-1-9
Mkt. Value / Shares Outstanding (mn): $5,912.7 / 353
Book Value/Share (Sep-2000): $8.22
Price/Book Ratio: 2.1x
ROE 2000E Average: 30.0%
LT Liability % of Capital: 26.0%
Est. 5 Year EPS Growth: 25.0%
Stock Data
52-Week Range: $48.50-$13.25
Symbol / Exchange: AMD / NYSE
Options: Pacific
Institutional Ownership-Vickers: 54.1%
Brokers Covering (First Call): 17
For full investment opinion definitions, see footnotes.
Opportunities to seize in 1H01
Visibility into the PC market is still limited, and we believe that the slowdown, particularly in the North American consumer market, will continue through the first quarter. The company admits that it will see higher
inventory levels at the end of the quarter, but it attributes some of the build to Duron product held back because of the late introduction of an advanced
chipset from Via.
In spite of uncertainty in the end markets, we believe that AMD's positioning against Intel in the first half of next year is excellent. First, we expect the problems associated with the Duron and the delyed UMA chipset from VIA to disappear; our checks with VIA assure us that KM133 product will be shipping by the first quarter. The KM133 will enable AMD to meet strong market demand for Durons - we think that the KM133/Duron combination stacks up quite effectively against Celeron and the Intel 815e chipset.
One might expect more limited sales of Duron this quarter to drive higher average selling prices, given the fact that the higher-end Thunderbird is still selling. However, our talks with AMD indicated that the company is doing its
best to move its remaining K6 products during the fourth quarter. The higher K6 volume should be sufficient to bring ASPs for the fourth quarter down sequentially - our model shows $86, down from $91 in Q3. Looking into the
first half of 2001, though, the potential to take ASPs north of $100 exists.
Additionally, we expect to see high-end desktop and mobile Palaminos in the first quarter and low-end Morgan counterparts a quarter later. With these product lines in place, we believe that AMD will be offering a compelling and
complete set of offerings for PC vendors in the value space. Flawless execution is essential for AMD to take advantage of the opportunity to seize market share.
Pitfalls to avoid
Nevertheless, we cannot overlook some big challenges AMD still faces in the commercial market. The Palamino will be the first product aimed at high-end desktops, low-end servers and workstations, which are completely new territory
for the company. We think that AMD's cancellation of its Mustang product, which was geared for workstations and servers alone, was driven by a lack of customer interest. We have even stronger reservations about the company's
plans to launch the Hammer family in late 2001, which is a 64-bit technology aimed at the server market. We believe that the resources needed to launch this family could take away from the necessary focus AMD should invest in its
desktop and mobile offerings.
Flash healthy, for now
AMD remains particularly positive about its flash business, which runs through the FASL JV - recent spot price concerns notwithstanding, and insists that it has not seen visibility deteriorate. A recent design win at Nokia is
encouraging news, although the fact that AMD's flash business is only 30% to 40% exposed to cellular is probably good news right now. We respect the company's efforts to maintain a reasonable pricing environment and solid
visibility with its large customers, and investors looking for the business to miss dramatically in the fourth or first quarters are probably mistaken. Given the large amount of capacity being added in the business, though, we expect to see lead times begin to come in sharply by the second quarter of 2001.
Maintaining rating
AMD is at an interesting point in its history - the problems in the PC business notwithstanding, the company is winding up one of the best years in its history
from both an execution and financial standpoint. CEO Jerry Sanders seems committed to handing over leadership to Hector Ruiz and his team, and we believe that Ruiz and Bob Rivet are capable of bringing a higher level of
execution consistency than the company has seen in the past.
The stock price, meanwhile, has declined to levels that seem to anticipate the kind of product and earnings meltdown that AMD has seen too often in the past.
If AMD is just able to execute consistently during the next two quarters, it would prove investors wrong. We are maintaining our intermediate-term Accumulate and long-term Buy ratings.
The real challenge for management will be to resist the temptation to overextend the company. Focus and realism are going to be vital at AMD during the coming year. |
