ML:LT BUY,tgt $150
Excerpts fr Merrill Lynch follow, 7/20/00
Investment Highlights:
• AMD reported earnings for the quarter that
were well ahead of our expectations. We had
been looking for $1.18 leaving aside the impact
of taxes, or $0.96 taxed at 20%. AMD
reported $1.21 at a tax rate of 20%.
• After factoring in the impact of taxes, our
2000 number is going from $5.52 to $5.13,
although our pretax number has been revised
up. Our 2000 number is up from $4.58 to
$5.25.
• We reiterate our intermediate-term
accumulate and long-term Buy ratings. We
are setting a 12-18 month price target of $150.
Fundamental Highlights:
• AMD has done a great job of ramping
production of its updated Athlon products
with on-chip cache. We believe that the
company has nearly completed its transition to
the new products.
• Demand for the lower-priced Duron products
is unusually strong – we believe that AMD is
sold out for the third quarter.
How ‘bout that gross margin . . .
Advanced Micro Devices reported results for the June
quarter that were well ahead of our expectations, especially
at the earnings level. Although revenue of $1.17 billion
was only slightly ahead of our $1.14 billion estimate,
profitability was far higher than we had forecast, with
operating margin 500 basis points ahead of our estimate.
The result was earnings per share of $1.21, factoring in an
effective tax rate of 20%. Our $1.18 had not been adjusted
to include the impact of a return to taxed earnings for
AMD – applying a 20% tax rate would have yielded
earnings of $0.96. We are revising our 2000 earnings
estimates to fully reflect the impact of taxation, and taking
the improved revenue and gross margin outlook into
account the decline in our numbers is relatively modest,
from $5.52 to $5.13. The pretax earnings forecast is
actually up for 2000, from $965 million to $1.065 billion.
For 2001 our earnings outlook has gone from $4.58 to
$5.25, using a tax rate of 31%. Were the tax rate to remain
unchanged in 2001 our earnings estimate would be $6.08.
Our revenue estimate for 2000 is essentially unchanged at
$4.9 billion, although we have taken our 2001 number up
from $5.49 billion to $6.1 billion.
AMD’s execution has been outstanding – the company
appears to have worked through the transition to updated
Athlon products with on-chip memory without seeing any
production hiccups, and early news from the Dresden fab
continues to be encouraging. The stock’s valuation is
extremely reasonable relative to other stocks in the sector
at 17.6x this year’s earnings number and 17.2x next year’s.
We enthusiastically reiterate our intermediate-term
accumulate and long-term buy recommendations – our 12-
18 month price target is $150.
AMD’s top line came in fairly close to our expectations,
and we estimate that microprocessor revenue (not
including chipsets) was $583 million, up $20 million
sequentially on units that were down from 6.5 million to
6.2 million. ASPs were up sequentially, although not quite
as much as we had expected, to $94 according to our
model. Part of the reason for the slower ASP increase
comes from the impact of still-robust K6 shipments, for
which selling prices are below $50. Early shipments of the
less expensive Duron part are also responsible. We note
that AMD is how shipping mostly updated Athlon
products – our checks in the grey market have confirmed
good availability.
Away from MPUs, AMD’s flash business performed well
as expected, posting revenue of $362 million. Comments
from management during the call and subsequently made it
clear that AMD does not buy into the slowing flash
memory scenario. The limited amount of product that
AMD sells onto the spot market has not seen any change in
demand or pricing, and demands from AMD’s contract
customers for the rest of 2000 and into 2001 are continuing
to go up.
The move to the higher-margin K7 parts has a significant
impact on margin, and although we were aggressive in
modeling an improvement we were not aggressive enough.
Gross margin was 47.7% as compared to our estimate of
44%.
Looks like Intel is leaving plenty of space
Competitive pressure from Intel has yet to materialize, and
we have raised our unit estimates for the year as a result –
we are now looking for 27.2 million units in 2000, up from
our previous estimate of 25.5 million. Our revenue
number hasn’t gone up much, though, because we are
seeing a more rapid shift towards the lower-priced Duron
product than we had expected. We are hearing that Duron
is sold out for the quarter, and although Athlon demand is
good the backlog is not quite as strong. Our ASP for all of
2000 has declined from $111 to $97 as a result. We don’t
think that the lower ASP represents a problem – AMD still
sees margins of 45% of better on Duron, we believe.
Expenses associated with the ramp of the Dresden fab will
begin to hit the cost of goods sold line in the September
quarter, and the result should be a decline in gross margin
– we are modeling 47%. Some of those expenses are
rolling off the R&D line, though, with the result that
operating margin should be flat QoQ. Improving capacity
utilization should get margin moving again in Q4.
Even at $150, AMD would only be trading on 30x this
year’s earnings, and given the company’s improving
fundamentals and the competitive vacuum left by Intel’s
ongoing capacity problems we think that an improved
valuation is reasonable to expect. |
