John
below is the report
Regards
-Albert
05:21am EDT 29-Jun-01 J.P. Morgan (Eric Chen, Ph.D.) INTC AMD INTC.N
1 of 3 Re-initiating Coverage on Intel and Advanced Micro Devices.
**** JP Morgan/JP Morgan H&Q **** JP Morgan/JP Morgan H&Q ****
Analyst: Eric Chen, Ph.D. 415-439-3210
Associate: David Dillon 415-371-4384
Associate: Scott Williamson 415-371-4513
Associate: Donald Lu, Ph.D. 415-371-4737
Associate: Brian McNamara 415-371-3201
Date: 6/29/01
1 of 3 Re-initiating Coverage on Intel and Advanced Micro Devices.
We are re-initiating coverage on Intel and Advanced Micro Devices with Long-
Term Buy ratings.
Our general view for the semiconductor sector is on the positive side, as we
believe that the global semiconductor industry will likely reach a bottom in
September. As such, we are recommending investors accumulate shares in
semiconductor leaders in front of the anticipated up-tick in business
fundamentals. As two of the most important companies in semiconductors, we
believe that shares of Intel and AMD are primary vehicles for exposure to the
semiconductor sector.
In the near-term, we believe that AMD will continue to enjoy market share
strengths due to the secular trend towards value PCs. We believe that AMD
represents a rare value in semiconductor investing with its shares trading at
roughly 2.8x book value, especially considering that the company's top line
will likely be flat this year in this difficult environment.
Looking out six to twelve months, we believe that Intel has a fairly good
chance of catching up in market share momentum. We believe that Intel will
benefit from a number of factors, including the new Pentium 4 architecture,
the transition towards 0.13 micron process and 300mm wafers, and the
introduction of the 845 chipset, etc. These factors, however, will unlikely
have a material impact on Intel's financial performance in the next couple of
quarters.
We are initiating our relative conservative estimates on Intel and AMD. For
Intel, we are forecasting revenue and EPS of $26.3B/$0.54 for C01 and
$28.5B/$0.71 for C02. For AMD, we are forecasting revenue and EPS of
$4.7B/$1.36 for C01 and $5.3B/$1.69 for C02.
Intel Corporation
Please contact your H&Q Sales Broker to see the complete report.
Intel Corporation - the world''s largest semiconductor company - designs,
develops, manufactures and markets to the computing and communications
industries chips, boards, systems,network interface card and software that are
the "necessary ingredients" of computers, servers and networking &
communications products.
Advanced Micro Devices, Inc.
FY End Dec 2000A 2001E 2002E
Stock Price $27.43 Q1 EPS $0.58 $0.37 $0.34
52-Week Range $13.56-47.50 Q2 EPS $0.61 $0.25 $0.39
Market Cap. (mil.) $9,649 Q3 EPS $0.64 $0.31 $0.47
Shares Out. (mil.) 352 Q4 EPS $0.53 $0.43 $0.48
Book Value/Shr $9.31 FY EPS $2.37 $1.36 $1.69
Net Cash/Shr. $4.54 FY REVS (M) $4,644 $4,704 $5,285
3-Year EPS Growth NM CY EPS $2.37 $1.36 $1.69
CY P/S 2.1 CY P/E 11.6 20.1 16.3
Advanced Micro Devices provides Windows compatible microprocessors, flash
memory devices, and communications and networking products that enhance the
power and utility of PCs as information-processing and communications tools.
AMD''s silicon solutions enable improved connectivity, superior visual
computing platforms, and faster, easier Internet access from PCs and other
information appliances.
Stock View on Intel and AMD
We are re-initiating coverage on the two computing semiconductor leaders,
Intel (INTC, $29.64, LTB) and Advanced Micro Devices (AMD, $27.43, LTB), with
Long-Term Buy ratings. Our generally positive rating reflects our macro view
that the overall semiconductor industry will likely bottom out in the
September quarter, and resume growth in the December quarter. For a more
detailed reading of our extensive study on the economics of semiconductor
cycles and our view on the current state of the industry, please see our
industry report dated June 29, 2001, "Sector Update, Re-initiating Coverage on
INTC, AMD, ALTR and XLNX."
AMD ranks near the top, with Intel not too far behind, of our coverage
universe in terms of our degree of enthusiasm, owing to several factors,
including:
*A relatively clean inventory channel for computing semiconductors.
*An anticipated recovery in general IT spending.
*An anticipated PC replacement cycle starting some time late this year or
early next year. (As an example, the authors of this report are dying for new
PCs.)
*Franchise, quality companies in its respective markets.
*Reasonable valuations relative to both historical troughs and other sub-
sectors of semiconductors.
We believe that the demand for PCs is still fairly weak, especially in the
performance segment, which is powered by the new P4. Motherboard manufacturers
in Taiwan are not yet witnessing any strength driven by the back-to-school
season. Accordingly, our overall PC forecast calls for just 1% growth in 2001
on a unit basis, lower than the prevalent projections.
The mainstream segment is expected to decline 6%, with the faster growing
value segment increasing approximately 14%. We believe that AMD has roughly a
39% share of the value segment and 13% of the mainstream segment for PC
processors. We owe much of our AMD enthusiasm to these facts - the company's
historical leverage against the growing value segment and market share gains
in both the value and performance segments. Even if one were to assume that
the two companies maintain their respective market share positions in the two
segments, the blended market share of AMD will expand owing to the trend
towards the value segment. This may be offset somewhat due to what we believe
will be potential strengths in Intel's upcoming product and manufacturing
strategies.
As touched on above, we are enthusiastic about the near to intermediate term
prospects for AMD. The following are a few factors that contribute to that
view:
*We believe the trend towards value PCs is going to play well into the hands
of AMD, given the company's historic success in this segment of the PC market.
To this end, we believe market share gains are likely with the advances to
the Athlon processor family relative to the still mainstream Pentium III.
*We believe that the slight product cycle hiccup that Intel has experienced,
transitioning from the PIII to the P4, has opened the door to AMD in the
performance segment, where the company has not realized overwhelming success
previously.
*In our opinion the company is moving beyond suspect execution issues, as
evidenced by management's envious execution through the current down cycle.
*On a valuation basis, shares of the company are trading a significant
discount to both our semiconductor group average Price/Book multiple and its
chief competitor, Intel.
We believe that over the intermediate term, possibly starting early 2002,
Intel will likely strengthen its position in PC processors. The following are
several factors that could contribute to Intel's strength:
*Intel's intention to push the Rambus DRAM (RDRAM) architecture seems to have
put the company in an awkward position against AMD. The introduction of the
Intel 845 chipset allows the P4 processor to work with less expensive
Synchronous DRAM (SDRAM). In volume, this factor alone could bring system
costs down by 30%, according to our analysis. We believe that Intel is ramping
volume on the 845 chipset.
*The introduction of DDR (double data rate) version of the 845 chipset early
next year will put Intel on equal footing with AMD in terms of cost (SDRAM vs.
Rambus DRAM) and performance (SDRAM vs. DDR DRAM and RDRAM) of the memory sub-
system.
*The introduction of the 4-layer motherboard, lowering system cost for a
P4/Rambus combination down by about 10-20%.
*A die shrink of P4 to 0.13-mm will potentially cut processor die cost by
roughly 40%. We believe that current 0.13-mm yield is still fairly
challenging, but the company is working vigorously on the transition.
*A manufacturing overhaul to 300mm will also take place in the next 12 months.
This will cut processor die cost by roughly 30%. We believe that Intel is in
a unique position to push this forward ahead of its peers, thanks to its
strong balance sheet.
*Intel is starting a new micro-architecture with P4, which should be able to
outpace AMD's Athlon, which is nearing the end of its very successful life
cycle, in terms of clock speed, scalability, and general performance.
Intel Model
The dominant market share that Intel enjoys in microprocessors also makes the
company quite susceptible to the cyclicality of the PC world. In fact, almost
80% of Intel's revenue streams are derived from PC or server-based
applications, although this percentage has been slowly declining, largely due
to growth in the communications world. In addition to microprocessors, which
accounted for approximately 70% of C00 revenues, Intel also collects
additional computer-based revenue from chipsets (roughly 7% of C00 revenue)
and board level products (6% of C00 revenue). As a result, we could not begin
to forecast numbers for Intel without first developing future growth rates for
PCs, servers and workstations.
First Call Corporation, a Thomson Financial company.
All rights reserved. 888.558.2500
-> End of Note <-
05:21am EDT 29-Jun-01 J.P. Morgan (Eric Chen, Ph.D.) INTC AMD INTC.N
2 of 3 Re-initiating Coverage on Intel and Advanced Micro Devices.
**** JP Morgan/JP Morgan H&Q **** JP Morgan/JP Morgan H&Q ****
Analyst: Eric Chen, Ph.D. 415-439-3210
Associate: David Dillon 415-371-4384
Associate: Scott Williamson 415-371-4513
Associate: Donald Lu, Ph.D. 415-371-4737
Associate: Brian McNamara 415-371-3201
Date: 6/29/01
2 of 3 Re-initiating Coverage on Intel and Advanced Micro Devices.
We are re-initiating coverage on Intel and Advanced Micro Devices with Long-
Term Buy ratings.
Our general view for the semiconductor sector is on the positive side, as we
believe that the global semiconductor industry will likely reach a bottom in
September. As such, we are recommending investors accumulate shares in
semiconductor leaders in front of the anticipated up-tick in business
fundamentals. As two of the most important companies in semiconductors, we
believe that shares of Intel and AMD are primary vehicles for exposure to the
semiconductor sector.
In the near-term, we believe that AMD will continue to enjoy market share
strengths due to the secular trend towards value PCs. We believe that AMD
represents a rare value in semiconductor investing with its shares trading at
roughly 2.8x book value, especially considering that the company's top line
will likely be flat this year in this difficult environment.
Looking out six to twelve months, we believe that Intel has a fairly good
chance of catching up in market share momentum. We believe that Intel will
benefit from a number of factors, including the new Pentium 4 architecture,
the transition towards 0.13 micron process and 300mm wafers, and the
introduction of the 845 chipset, etc. These factors, however, will unlikely
have a material impact on Intel's financial performance in the next couple of
quarters.
We are initiating our relative conservative estimates on Intel and AMD. For
Intel, we are forecasting revenue and EPS of $26.3B/$0.54 for C01 and
$28.5B/$0.71 for C02. For AMD, we are forecasting revenue and EPS of
$4.7B/$1.36 for C01 and $5.3B/$1.69 for C02.
For C01 and C02 we are forecasting PC unit growth of (3%) and 8%,
respectively. While C01 pulls back a little, as IT softness in the US appears
to be making its way into Europe and possibly Asia, we expect C02 revenue to
rebound slightly. The C02 PC growth will likely be helped by the ramp of the
newer, lower costing P4, in addition to the release of the delayed Windows XP
for consumers. As each PC contains just one microprocessor, this translates
into identical unit growth for MPUs. For servers and workstations we are
assuming C01 and C02 unit growth of (4%) and 13%, respectively. Unlike PCs,
the number of processors per workstation and server is growing, as newer
products contain multiple processors. While our model accounts for such
growth, the current average number of processors per workstation is estimated
to be 1.3, while servers in aggregate average 2.0 processors per unit.
While all prices will likely feel pressure in the current environment, PC
microprocessors have been rather dramatically reduced recently, due to pricing
wars between Intel and rival AMD. In other segments, wireless phone driven
Flash memory, which made up over 7% of Intel's C00 revenue, is expected to
remain flat to down in 2001, where we expect Intel to maintain its 24% market
share. The communications and networking segments, which encompass many
smaller yet promising new future revenue streams for Intel, continue to
display the weakest current demand, similar to the overall communications
sector.
All in, we are rolling out estimates for Intel with Q2C01 revenue of $6.2
billion, representing a 7% sequential decline from Q1C01 revenue levels, with
a corresponding EPS of $0.11, on gross margins of 48%. We believe that Q2C01
will likely represent the bottom of the current downturn, and expect Q3C01
revenue to post a 5% up tick to $6.5 billion, creating EPS of $0.12. But we
are not very confident of this sequential up-tick, given the latest indication
of weak motherboard build. We forecast Q4C01 to continue in the recovery, as
the delayed Windows XP release could provide a growth catalyst to PC demand,
increasing Q4 revenue an additional 6% to $6.9 billion with a Q4C01 EPS of
$0.14, as margins gradually expand to 49%. Therefore, C01 revenue and EPS
amount to $26.3 billion and $0.54, respectively. Looking into C02, we are
forecasting top line growth of 9% to $28.5 billion, EPS growth of 32% to
$0.71, benefiting from continued gross margin expansion, and lower overall
operating expense levels.
AMD Model
The same detailed model that we used to construct our Intel forecast is
directly applicable to Intel's only real competitor and chief rival, AMD.
While AMD has historically been limited in the server market, it recently
introduced its first multiprocessing-capable platform for one- and two-way
servers and workstations, enabling AMD to penetrate the commercial market. We
have modeled only slight market gains against its Goliath competitor in the
server business beginning late C01. Intel has historically excelled in the
performance or mainstream PC market, while AMD did well in the value-oriented
PC marketplace. Recently however, these two competitors have taken aim into
each other's backyard. For example, AMD recently gained market share in the
performance segment, as its high performance Athlon microprocessor equaled and
surpassed the performance of Intel's Pentium III before Intel could answer
with its new, highly scalable P4. Likewise, Intel has recently aimed at the
currently higher growing value segment, with its Celeron products. While AMD
did gain share in the performance realm, we are modeling modest gains for
Intel in the value segment.
Other than processors, which made up approximately 56% of its Q1C01 revenues,
AMD also competes with Intel in Flash memory products. AMD produces its Flash
products through a joint venture with Japanese giant Fujitsu. Flash made up
roughly 35% of AMD's Q1 sales, for which it accounted for an estimated 15%
market share. We expect AMD to maintain this share moving forward. AMD's
remaining business units are relatively small and include embedded processors,
network products (ex. Ethernet physical layer), and chipsets. The combination
of these units accounted for 6% of AMD Q1C01 revenue. According to the terms
of the sales of both Vantis and Legerity, AMD will temporarily act as a
foundry for these two companies. As of Q1C01, these foundry revenues
accounted for approximately 4%, or $42 million, of AMD's revenue, and we
expect the foundry revenue to gradually reduce and stop towards the end of C01
and early C02, as the customers find alternative fabs.
We are forecasting total AMD sales of $1.06 billion, or roughly 10% below
Q1C01 revenue, and EPS of $0.25 for Q2C01. As with Intel, we are forecasting
Q2C01 to be the low water mark and estimating Q3C01 revenue to increase 8% to
$1.15 billion, creating an EPS of $0.31. We are also modeling modest
improvement in Q4C01, as revenue further rises to $1.3 billion, with EPS
growing to $0.43. On an annual basis, our C01 revenue estimate actually
points to a slight increase, 1%, over C00 to $4.7 billion, as the company
benefits from the aforementioned market share gains in the performance
segment. C01 EPS are estimated to be $1.36. Looking into 2002, we are
forecasting top-line growth of 12% to $5.3 billion, creating an EPS of $1.69.
Gross margin expansion will likely be limited in 2002 as the company may
witness pricing pressure as it prepares to compete with Intel and its Q3C01
ramp of P4.
Valuation
From a valuation perspective we believe that both AMD and Intel represent
reasonable valuations at current levels, though for slightly different
reasons. For AMD, on the basis of both Price/Book and Price/Sales, shares of
the company represent the best absolute valuation of the group. Shares of AMD
have historically traded at a significant discount to both the semi device
group and its chief competitor Intel. Having said this, the historical
valuation gap is narrowing significantly, as AMD has executed well up to this
point of the down cycle and thus been able to gain market share from Intel
over the past year. Nonetheless, shares of the company continue to trade at
2.7x book value, nearly a 45% discount to Intel, and 1.4x C02 revenues, a
discount to Intel of roughly 76%. Given the company's share gains, as
mentioned above, recent product introductions and improved management
execution, we would expect the valuation gap between the two companies to
narrow. We would be buyers of AMD at current levels. From a relative
valuation perspective, shares of Intel, trading at approximately 5.0x book,
are approaching 1996 trough valuation levels of 4.92x and are well below 1998
and 2001 trough levels of 6.6x and 5.63x, respectively. From a C02
Price/Sales basis, shares of the company are trading at roughly 6.1x, while in
the previous troughs of 1996 and 1998, the company showed Price/Book multiples
of 5.7x and 6.4x, respectively. Again, the company is reflecting a relatively
reasonable valuation.
First Call Corporation, a Thomson Financial company.
All rights reserved. 888.558.2500
-> End of Note <- |
