Joe Osha [ML] Advanced Micro Devices K7 chugs along
ACCUMULATE
Long Term BUY
Reason for Report: 4Q00 Earnings Results
Investment Highlights:
• AMD reported results for the December
quarter that were in line with our recently
revised estimates.
• We have cut our FY2001 EPS estimate from
$2.43 to $1.84 to account for more
conservative comments from AMD, but we
think AMD could beat the number. We’ve
also initiated a 2002 EPS estimate of $2.21.
• At 10x earnings the stock is discounting an
earnings implosion that we don’t see
happening. We like the stock better than Intel
at the current price.
Fundamental Highlights:
• We believe AMD is picking up market share
with the K7, especially in the Duron
configuration aimed at the low end of the
market.
• We expect market share gains to continue
over the course of the year – Intel has little
ability to respond to AMD until it can begin to
drop PIII prices aggressively, which we don’t
see happening until the end of 2001 at the
earlier.
AMD makes the quarter . . .
AMD reported results for the December quarter that were
largely in line with our recently reduced forecasts,
although slightly worse than street estimates. Comments
regarding the outlook for the first quarter were reasonably
optimistic, especially in light of the decline in revenue that
Intel is expecting. We think that AMD is picking up
market share, especially in the low end of the MPU
business, and expect that to continue through the first part
of 2001 at a minimum. We reiterate our intermediate-term
Accumulate and long-term Buy recommendations – we
regard AMD as a more attractive investment opportunity
than Intel at the current price.
The December quarter results held few surprises relative to
our conservative forecasts. MPU unit volume of 7 million
pipped our 6.9 million estimate, although ASP of $81 was
lower than we expected. End-of-life clearance efforts on
the K6 were partially responsible, but we also believe that
Duron sales were a higher percentage of the mix than we
had expected. Although AMD does not formally report a
breakout, we think that Duron amounted to 2 million of the
total 5 million K7 parts sold during the quarter. Flash
revenues were in line with our estimate, up 9%
sequentially.
AMD deserves credit during a tough quarter for keeping a
handle on inventory – at $343 million, the December
quarter number was only up slightly from September’s
$290 million. Our checks also indicate that inventory of
AMD processors in distribution is not excessive, although
it is harder to read the inventory situation for system
companies. Some simple math indicates that AMD’s
market share is improving where it matters. Although
overall unit volume was flat sequentially, K7 volumes
were up from 3.6 million to 5 million in a quarter that
Intel’s unit volume was flat at about 30 million units.
. . . and delivers a decent outlook as well
Looking forward, we were somewhat surprised by how
conservative AMD’s top-line outlook for the whole year is,
given the relatively solid outlook for the first quarter. We
think that the company is simply being cautious in light of
the shaky environment in the semiconductor business – if
K7 continues to progress as it has, results should be better
than the 15% top-line growth discussed in the call.
Nevertheless, we have elected to be conservative as well,
and have metered our 2001 top line estimate downwards
from $5.8 billion to $5.3 billion. Most of the reduction
comes from a reduction in forecast MPU ASP from $104
to $88 – comments on Jan. 17 indicated that Duron should
grow as a percentage of the mix even more quickly than
we had modeled.
Taking more aggressive R&D spending plans into account
as well, forecast earnings per share drops from $2.43 to
$1.84. Investors should note that the decrease is mostly
due to an increase in the effective tax rate – operating
income is forecast at flat YoY. We are also initiating a
2002 earnings estimate of $2.21. We see little downside to
our current estimates, and indeed expect to see our
numbers move upwards if the PC demand environment
recovers over the course of the year. Market share gain
should continue. At 10x forecast earnings we think that
the stock is discounting an implosion in earnings that we
don’t see happening.
Price: $18.56
Estimates (Dec) 2000A 2001E 2002E
EPS: $2.35 $1.84 $2.21
P/E: 7.9x 10.1x 8.4x
EPS Change (YoY): -21.8% 20.1%
Consensus EPS: $2.02 NA
(First Call: 08-Jan-2001)
Q1 EPS (Mar): $0.57 $0.39
Cash Flow/Share: $1.79 $1.98 $8.75
Price/Cash Flow: 10.4x 9.4x 2.1x
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: C-2-1-9
Mkt. Value / Shares Outstanding (mn): $6,644.5 / 357.5
Book Value/Share (Dec-2000): $9.05
Price/Book Ratio: 2.1x
ROE 2000E Average: 26.0%
LT Liability % of Capital: 27.7%
Est. 5 Year EPS Growth: 25.0%
Stock Dataw
52-Week Range: $48.50-$13.56
Symbol / Exchange: AMD / NYSE
Options: Pacific
Institutional Ownership-Vickers: 54.2%
Brokers Covering (First Call): 16
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: In Line (25-Oct-2000)
Growth: Overweight (25-Oct-2000)
Income & Growth: Overweight (25-Oct-2000)
Market Analysis; Technical Rating: Average (03-Jan-2001)
**The views expressed are those of the macro department and do not
necessarily coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes. |
