"Advanced Micro (AMD-NYSE) Time To Hunker Down"
NEUTRAL* Long Term: BUY
RESEARCH COMMENT: 20127410
OCT 01, 2001
Osha
If your long, all you can do is hope he's wrong. Joe takes 02' down to .23 from .68 Seems base this thesis on
suspicions of channel stuffing and no faith in the roadmap over the next year. What can AMD do? Just hope that INTC
eases up. dave
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Merrill Lynch, as a full-service firm, has or may have business relationships,
including investment banking relationships, with the companies in this report.
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Reason for Report: Reducing Earnings Estimates
RC-TOPIC:Highlights:
o We are reducing our 2001 and 2002 earnings estimates for AMD in light of
both demand problems and competitive pressures.
o Our 2001 earnings estimate goes from $0.36 to $0.27, and our 2002 estimate
drops from $0.68 to $0.23. We believe that 2001 revenue of $3.9 billion will
remain flat in 2002.
o Intel's unrelenting aggressiveness on P4 is beginning to reserve the
market share gains that AMD made late last year and early this year. It is
difficult to see how AMD can respond for the intermediate term.
o We credit AMD with much better execution during the past year than the
company has achieved in other product cycles. The company's survival is not in
doubt.
o Our stance on the name continues at neutral - we would like to see Intel's
stance ease a little before becoming more positive on AMD.
RC-TABLE0166002900
Price: $8.15
Estimates (Dec) 2000A 2001E 2002E
EPS: $2.35 $0.27 $0.23
P/E: 3.5x 30.2x 35.4x
EPS Change (YoY): -88.5% -14.8%
Consensus EPS: $0.31 $0.44
(First Call: 24-Sep-2001)
Q3 EPS (Sep): $0.61 -0.08
Cash Flow/Share: $4.19 $1.53 $1.47
Price/Cash Flow: 1.9x 5.3x 5.5x
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: C-3-1-9
Mkt. Value / Shares Outstanding (mn): $2,779.2 / 341
Book Value/Share (Jun-2001): $11.16
Price/Book Ratio: 0.7x
ROE 2001E Average: 2.5%
LT Liability % of Capital: 25.1%
Next 5 Year Dividend Growth: NA
Stock Data
52-Week Range: $34.65-$7.80
Symbol / Exchange: AMD / NYSE
Options: Pacific
Institutional Ownership-Vickers: 60.3%
Brokers Covering (First Call): 16
*Intermediate term opinion last changed on 04-Apr-2001.
For full investment opinion definitions, see footnotes.
RC-T-END:
Dropping 2001, 2002 numbers
Our analysis of just-released August SIA data and data from the PC supply chain
leaves us convinced that Advanced Micro Devices faces sharp declines in demand
for microprocessors in the coming 4-5 weeks. We are reducing our Q3 and Q4
earnings estimates for AMD, which takes our FY2001 number from $0.36 to $0.27.
Although we have limited insight into demand for 2002, given the competitive
pressure AMD faces we are cutting our '02 earnings estimate as well, from $0.68
to $0.23. Our new number reflects what we believe will be substantial pricing
pressure on AMD through most of the year, as well as lower unit shipments.
Our intermediate-term rating continues at neutral. We recognize the fact that
AMD is trading at less than book value, which has in the past been a support
level for the stock. However, we cannot see a positive catalyst for the name
until it becomes clear how AMD will respond to Intel's extremely aggressive
pricing of P4.
Decent August SIA data raises inventory questions
It was difficult to tell during August whether the PC business saw any real
back-to-school demand - certainly comments from PC makers and weak DRAM pricing
did not suggest an improvement. However, just-released August SIA shipment
showed a 15% sequential increase in MPU shipments in August, which compares
reasonably with the 1996-2000 average of 14%. ASPs also ticked up
sequentially, probably as a result of Intel's P4 ramp. August was not a
disaster for the MPU business at all, then, and the data suggest that both
Intel and AMD saw decent sell-in.
Decent August numbers raise the question of how the industry is going to react
to very weak sell-through in September, however. AMD does not appear to face
any chipset roadmap problems as Intel does, but the competitive pressure from
Intel is extreme. With adequate supplies of P4 available, Intel has been going
after market share that it lost to AMD last year and early this year, and
seeing some measure of success. Further announcements along the lines of last
week's news from Gateway are a possibility during the coming quarter.
ASP and unit forecasts both cut
With that in mind, we are cutting both our unit and ASP assumptions for AMD's
microprocessor business. Our unit forecast for 2001 has been reduced from 31
million to 30.1 million, with the reduction falling mostly in the fourth
quarter. ASP for the year remains at $78, although our Q4 number declined by
$1 to $73. Our reductions to next year's assumptions are more substantial,
with units going from 39 million to 34 million and ASP going from $75 to $69.
Revenue, earnings expected to be flat in 2002
Factoring in other smaller changes to our flash model - we now expect business
to be flat YoY - we now have total revenue and gross margin for AMD roughly
flat in 2002. The resultant earnings estimate of $0.23 is roughly flat as
well.
Does AMD stay low-end or try to leapfrog again? Hard to say . . .
The basic question for AMD now lies in whether to try and immediately bring up
a next-generation microprocessor to compete more effectively with the P4, or
concentrate on wringing cost out of the K7 with a die shrink and beating Intel
at the low end of the business. We believe, and comments from Via confirm,
that the Duron - AMD's value configuration of the K7 - is still selling well.
We also know that AMD has a process migration planned at Dresden later this
year. We think it's possible, if costs are cut, for AMD to be a competitive
and profitable supplier of low-cost microprocessors. Whether the company
chooses to take that route, or goes the riskier and more expensive path of
attempting to leapfrog Intel once again, remains unclear.
Execution has been solid - AMD looks better now than it did in 1998
We do credit AMD with consistent product and manufacturing execution during the
last twelve months, something that has not always been true. The production
ramp at Dresden has been flawless, and AMD has not missed any production
introduction targets on K7 this year. The actual survival of AMD was a
question in 1998, when the company's K6 had been beaten by Intel's Celeron -
that is not the case now, we believe.
Investors should stand back and let the dust settle
However, it is unclear how AMD can respond over the intermediate term to
Intel's P4 pricing blitz. Intel has demonstrated over the past two quarters
that it is willing to incur material damage to its own financial model in order
to hurt AMD, and as long as that continues to be the case we believe there is
little that AMD can do. Investors should sit back, remain neutral on the
stock, and wait to see when Intel eases up, in our opinion.
RC-TABLE0176007000
(Panel 1)
Table 1: Historic and Forecast Income Statement
($mill/%) Q100 Q200 Q300 Q400 Q101 Q201 Q301E
Revenues 1,092.0 1,170.4 1,206.5 1,175.2 1,188.7 985.3 832.0
Cost of Sales 605.8 612.6 639.0 657.3 714.8 636.2 569.8
Gross Profit 486.3 557.9 567.5 517.9 473.9 349.1 262.2
Operating Expenses 305.6 307.7 304.7 322.8 306.9 327.4 316.2
R&D 161.3 155.7 162.8 162.1 157.8 171.1 166.4
SG&A 144.3 152.0 141.9 160.8 149.1 156.3 149.8
Op Income 180.7 250.2 262.8 195.0 167.0 21.7 -54.0
Non-op Inc (Exp) 9.6 8.7 339.3 5.5 -2.8 -7.9 10.0
Pretax Income 190.3 258.9 602.2 200.5 164.2 13.8 -44.0
Provision for Taxes 0.0 51.8 175.0 30.1 52.5 3.7 -11.9
Effective Tax Rate 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Inc bef JV Equity 190.3 207.1 427.1 170.5 111.7 10.1 -32.1
JV Equity Income -1.0 0.0 4.4 7.5 13.2 7.3 0.3
Net Income 189.3 207.1 408.7 178.0 124.8 17.4 -31.9
Earnings per Share 0.57 0.61 0.64 0.53 0.37 0.05 (0.08)
Shares Outstanding 343.9 352.4 352.9 349.8 351.8 340.5 350.0
% of Revenues
Cost of Sales 55.5% 52.3% 53.0% 55.9% 60.1% 64.6% 68.5%
Gross Profit 44.5% 47.7% 47.0% 44.1% 39.9% 35.4% 31.5%
Operating Expenses 28.0% 26.3% 25.3% 27.5% 25.8% 33.2% 38.0%
R&D 14.8% 13.3% 13.5% 13.8% 13.3% 16.0% 20.0%
SG&A 13.2% 13.0% 11.8% 13.7% 12.5% 14.5% 18.0%
Op Income 16.5% 21.4% 21.8% 16.6% 14.1% 2.2% -6.5%
Non-op Inc (Exp)
Pretax Income 17.4% 22.1% 49.9% 17.1% 13.8% 1.4% -5.3%
Net Inc bef JV Equity 17.4% 17.7% -3.3% 14.5% 9.4% 1.0% -3.9%
(Panel 2)
Table 1: Historic and Forecast Income Statement
($mill/%) Q401E FY00 FY01E FY02E
Revenues 841.0 4,644.2 3,847.0 3,894.0
Cost of Sales 574.1 2,514.6 2,494.9 2,560.0
Gross Profit 266.9 2,129.6 1,352.1 1,334.0
Operating Expenses 315.4 1,240.8 1,265.9 1,265.6
R&D 164.0 641.8 659.3 662.0
SG&A 151.4 599.0 606.6 603.6
Op Income -48.5 888.7 86.2 68.4
Non-op Inc (Exp) 10.0 363.2 9.3 50.0
Pretax Income -38.5 1,251.9 95.5 118.4
Provision for Taxes -10.4 256.9 34.0 37.9
Effective Tax Rate 0.0 0.0 0.0 0.0
Net Inc bef JV Equity -28.1 995.0 61.5 80.5
JV Equity Income 0.3 11.0 21.0 2.0
Net Income -27.9 1,006.1 82.5 82.5
Earnings per Share (0.07) 2.35 0.27 0.23
Shares Outstanding 352.0 349.7 348.6 380.0
% of Revenues
Cost of Sales 68.3% 54.1% 64.9% 65.7%
Gross Profit 31.7% 45.9% 35.1% 34.3%
Operating Expenses 37.5% 26.7% 32.9% 32.5%
R&D 19.5% 13.8% 17.1% 17.0%
SG&A 18.0% 12.9% 15.8% 15.5%
Op Income -5.8% 19.1% 2.2% 1.8%
Non-op Inc (Exp)
Pretax Income -4.6% 27.0% 2.5% 3.0%
Net Inc bef JV Equity -3.3% 21.4% 1.6% 2.1%
Source: Company Information, Merrill Lynch Estimate |
