pru reiterated buy rating
06:52am EDT 6-Jul-01 Prudential Securities (H.MOSESMANN 650-320-1631) AMD INTC
AMD: PRE-ANNOUNCEMENT DRIVEN BY MPU ASPS & FLASH - MAINTAIN BUY.
AMD: PRE-ANNOUNCEMENT DRIVEN BY MPU ASPS & FLASH - MAINTAIN BUY.
PRUDENTIAL SECURITIES July 6, 2001
Advanced Micro Devices (AMD - $28.64) -- NYSE
----- ANALYST(S) -------------------- -------- OPINION -------
Hans Mosesmann 650.320.1631 Current: Buy
Traci Tsuchiguchi 650.320.1639 Risk: High
Target: $30.00
Industry: Market Outperform
The senior analyst(s) does not have a material position in any of the stocks
mentioned in this report.*
----- EARNINGS ------------------------------------------------------------
FY Rev EPS P/E 1Q 2Q 3Q 4Q
Actual 12/00 $4,644.2A $2.36A 12.6X $0.57A $0.61A $0.64A $0.53A
Current 12/01 $4,273.7E $0.71E 40.3X $0.37A $0.03E $0.11E $0.20E
Prior $4,688.7E $1.50E 19.1X $0.30E $0.37E $0.46E
Current 12/02 $4,600.0E $1.50E 19.1X $0.21E $0.27E $0.42E $0.59E
Prior $5,350.0E $1.90E 15.1X $0.45E $0.45E $0.48E $0.52E
----- FUNDAMENTAL --------------------------------------------------------
Avg. Volume: 7,100,000 Div/Yield: NA EPS Growth: 0.00%
Market Cap: $9,404 m 52w Range: 46.10-13.60 P/E / Growth: NM
Shares: 315.99 m
----- BUSINESS -----------------------------------------------------------
Advanced Micro Devices (AMD), headquartered in Sunnyvale, CA, focuses on two
major digital semiconductor product segments: microprocessors (MPUs) and non-
volatile memories. Although AMD is a key player in several high-growth product
areas, the focus for investors over the years on AMD has been as a MPU supplier
(supplier of x86 Windows compatible MPUs).
----- HIGHLIGHTS ----------------------------------------------------------
* AMD pre-announced its June quarter indicating that sales would decline
around 17% QoQ (versus our expectation of a 9% decline) due to processor pricing
and demand for flash memory.
* We do not see the $95 million top line miss as too bad, and the severity of
the EPS miss is due to the significant operating leverage in the model.
* We view the key issue as MPU unit demand, which is holding up. Athlon and
Duron unit sales in the quarter were at record levels, up QoQ, beating our
expectation of a QoQ unit decline.
* While we are not alarmed by the magnitude of ASP erosion in the quarter, we
are surprised by the late timing of the pre-announcement.
* We are revising our June quarter revenue and EPS estimates to $985 million
and $0.03, from $1.08 billion and $0.30. Our full year 2001 and 2002 EPS
estimates are now $0.71 and $1.50, from $1.50 and $1.90, respectively. Our new
price target is $30, down from $38. Maintain Buy.
----- DISCUSSION ----------------------------------------------------------
Processor ASPs Pressured By Duron Mix. Yesterday after the close, AMD
pre-announced its June quarter indicating that sales declined around 17% QoQ,
versus previous guidance of up to a 10% decline. (The stock sold off to the
mid-20s in after hours trading.) AMD cited aggressive processor pricing and
continued weak demand for flash memory as reason for the worse than anticipated
results. However, the company did indicate that unit sales of its Athlons and
Durons were at record levels, up sequentially from our estimate of 7.3 million
units in the March quarter, and beating our expectation of around 7.1 million
units, in the June quarter. We view this as a positive, as demand held up, at
least from a unit perspective. We have been cautious regarding AMD's ASP
scenario in the quarter, as we indicated in our earnings preview, as we have
been cognizant of the aggressive pricing and rapid push of Intel's (INTC, Buy,
29.84) P4 architecture into the mainstream. We believe that the magnitude of
AMD's ASP erosion in the quarter was due to a mix issue in which the company
sold a greater number of lower-end Durons (with spot prices in the low-$30 range
for 800 MHz processors and in the mid-$20 range for 750 MHz processors). This,
we believe, brought down blended ASPs into the $80-level, down from our
expectation of around the $90-level.
Weak Flash Memory Demand Continues. AMD indicated that demand for flash memory
continues to be weak, which we did not see as much of a surprise. In fact, the
company garners a disproportionate amount of its flash memory sales from the
telecom end market (around 60% in 2000). We had modeled for AMD's flash memory
sales in the June quarter to come in around $350 million, down 24% sequentially.
We're Not Looking For Fireworks in 2H01. But we are looking for an uptick in the
second half from demand levels in the first half. We are also anticipating
that 2002 will be a better year for the industry than 2001. As such, we are
maintaining our Buy rating on the stock. In the mid to near term, we believe
that the company's Athlon 4 mobile solution will help to stabilize its overall
ASPs and that the company will remain competitive.
Earnings Revision. We are revising our June quarter estimate to $985 million
and $0.03, down from $1.08 billion and $0.30, in-line with company guidance. As
such, our full year 2001 revenue and EPS estimates go to $4.27 billion and
$0.71, down from $4.69 billion and $1.50. Our 2002 revenue and EPS estimates
are now $4.6 billion and $1.50, from $5.35 billion and $1.90. As such, we are
revising our price target to $30, down from $38, based on a 20 times multiple
applied to our 2002 EPS estimate of $1.50, consistent with the multiple
previously applied. Maintain Buy rating. Or, on a price to sales basis, the
stock is currently trading around 1.9 times sales, compared to previous peaks
above 3 and 4 in 1997 and 2000, respectively and a 5 year average of 1.7 times.
The stock historically troughs around 1 times sales. The company is expected
to report its June quarter results after the close on Thursday, July 12th. |
