<font color=red>ML's Osha - very positive
00:20am EDT 12-Oct-00 Merrill Lynch (J.Osha (1) 415 676-3510) AMD
ADVANCED MICRO:Skewing Towards Duron
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
ADVANCED MICRO DEVICES (AMD/NYSE)
Skewing Towards Duron
Joseph Osha (1) 415 676-3510
ACCUMULATE Long Term: BUY
Reason for Report: Earnings Reported
Investment Highlights:
o AMD slightly beat our $0.62 for the quarter, as a result of lower
expenses. Revenue was a little lower than our forecast.
o We are dropping $0.04 from our Q4 estimate, driven by a combination of
more modest revenue expectations and lower gross margin.
o We suggest that the stock is already cheap, however, and execution
continues to be solid. We reiterate our intermediate-term Accumulate rating.
Fundamental Highlights:
o Overall demand for K7 products continues to be solid, and the company is
hitting its earlier unit targets for the K7 ramp.
o However, mix is skewing towards less expensive Duron products as AMD
continues to struggle in its efforts to penetrate the tier-one corporate
desktop market.
o AMD is blaming chipset infrastructure issues for a more conservative Q4
Duron sales outlook. It is difficult for us to tell from the company's
comments whether end demand is in fact improving or not.
Price: $22.75
Estimates (Dec) 1999A 2000E 2001E
EPS: -1.10 $2.56 $2.66
P/E: NM 8.9x 8.6x
EPS Change (YoY): NM 3.9%
Consensus EPS: $2.56 $2.50
(First Call: 11-Oct-2000)
Q4 EPS (Dec): $0.22 $0.74
Cash Flow/Share: $1.45 $3.92 $4.48
Price/Cash Flow: 15.7x 5.8x 5.1x
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: C-2-1-9
Mkt. Value / Shares Outstanding (mn): $8,030.8 / 352.9
Book Value/Share (Sep-2000): $8.22
Price/Book Ratio: 2.8x
ROE 2000E Average: 30%
LT Liability % of Capital: 26%
Est. 5 Year EPS Growth: 25%
Stock Data
52-Week Range: $48.50-$8.19
Symbol / Exchange: AMD / NYSE
Options: Pacific
Institutional Ownership-Spectrum: 56.4%
Brokers Covering (First Call): 15
For full investment opinion definitions, see footnotes.
Expense control drives slightly upside
AMD beat our Q3 earnings estimates modestly, posting a result of $0.64 as
compared to our estimate of $0.62. Aggressive control of operating expenses
underpinned the numbers - revenue of $1.206 billion was slightly below our
expectations. For the upcoming quarter, we are trimming our revenue estimate
slightly, from $1.448 billion to $1.418 billion, driven mostly by lower
expected ASPs. AMD appears to be realizing somewhat less success than we had
hoped in its efforts to penetrate the tier 1 corporate desktop market, and as a
result is seeing its product mix skew towards the value-oriented Duron product.
We are dropping four cents from our Q4 earnings estimate, going from $0.78 to
$0.74, partially as a result of the more modest revenue estimate and partially
driven by a lower gross margin estimate. With the current dismal expectations
for the PC sector and AMD's reasonable valuation in mind, though, we are
maintaining our intermediate-term Accumulate recommendation and 12-18 price
objective of $75.
Microprocessor revenue for the quarter of $625 million slightly undershot our
$660 million estimate. Unit volume was actually better than we had been
expecting at 6.9 million units, but ASP of $91 was nearly $10 below what we had
been hoping for, and flat sequentially. Part of the ASP pressure came from
higher K6 unit shipments, which carry a sub $50 selling price.
AMD's mix is skewing towards Duron
More important, though, is the fact that AMD is seeing its K7 mix skew towards
Duron, which carries a significantly lower ASP than the performance-geared
Thunderbird version of Athlon. Despite what should be enormous market share
gain potential at the expense of Intel's PIII, which is nearing the end of its
life, AMD seems to be having trouble convincing first-tier PC makers to embrace
Athlon for high-end corporate desktops. The result has been greater focus on
Duron in order to keep overall unit growth ramping. Duron is an excellent
product, but offers both lower ASPs and lower margins than Thunderbird.
AMD's flash business continues to perform well, beating our $400 million Q3
revenue estimate by $20 million. Below the top line, gross margin was largely
as we expected, as were R&D expenses. SG&A expenses were about $12 million
lower than we had expected, and generated the $0.02 upside relative to our
estimates.
Chipset infrastructure problem blamed Q4 Duron limitations
Looking forward, the biggest issue affecting AMD for the fourth quarter is a
chipset infrastructure problem. AMD had been planning on availability of an
integrated graphics chipset from Via to support sales of Duron into low-end
systems, and with that product not available now until December AMD feels that
its sales of Duron into sub $500 may be gated. The alternative would be
discounting Duron aggressively enough to compensate for the additional cost
associated with a separate graphics chip, which is something AMD does not want
to do. Duron inventory is likely to build during Q4 as a result.
We would expect some impact on AMD's microprocessor gross margin structure as
Duron comprises more of the total, especially as some discounting is likely to
occur this quarter anyway. Overall MPU gross margins are better than the
corporate average, but the outgrowth is that we cannot expect any upside to
company gross margin for the fourth quarter - we are calling for 47%, down from
our previous estimate of 48%.
Hard to tell whether end demand is firm or not
It is difficult to tell from AMD's comments whether the end demand environment
for PCs is improving or not. AMD is upbeat, but given the extent to which the
company is gaining market share is may be difficult for management to judge
what is actually happening. There may also be some weakness in corporate
desktop that is masked by AMD's problems penetrating that market. There was at
any rate little in AMD's comments to ease our concerns regarding PC demand.
Valuation is reasonable, though, and execution is still solid
At a share price of $23 on forecast earnings of $2.56 this year and $2.66 next,
AMD appears extremely cheap. We think that the stock price is factoring in
concerns regarding AMD's ability to execute the K7 ramp that are overly
pessimistic. Our recent trip to AMD's fab in Dresden left us convinced that
AMD is on track with that facility, and there have been no hiccups in the
Thunderbird or Duron launches. Even if AMD continues to struggle with higher
end products there is a great deal of volume to be done in consumer and low-end
enterprise, especially given Intel's focus on the high end of PIII and the
upcoming ramp of P4. We are staying with our intermediate-term Accumulate
rating. |
