All - DLJ downgrade
07:46am EDT 1-Oct-97 DLJ Securities (Krishna Shankar) AMD
Advanced Micro Devices: Q3 Operating Loss Will be Wider Than Expected
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
October 1, 1997 Krishna Shankar (415) 249-2231
Christian Alexander (415) 249-2236
ADVANCED MICRO DEVICES (AMD: $32.56) #++
Q3 Operating Loss Will be Wider Than Expected
Range: Earnings Per Share 1997 vs 1996 % Chg
49-14 Old New P/E Ratios F1QA $0.09 vs 0.18 -50%
(FY:Dec.) 1998E $3.50 $ 9.3 F2QA 0.07 vs (0.26) NM
1997E 0.60 0.29 112.3 F3Q (0.35) vs (0.28) NM
1996A (0.50) NM F4Q 0.48 vs (0.15) NM
Yield: % Market Cap.: $4,815 5-Yr. Growth Rate: 20%
Dividend: $ Avg. Trading Vol.(000): 2,908 Book Value: $14.13
RATING: RL Buy Change: None 12-Mo. Target: $45-50
VIEWPOINT
Following AMD's earlier pre-announcement of an operating loss for the third
quarter due to manufacturing yields on the K6, the company indicated that
the loss for the quarter will be deeper than thought as the impact of the
problem on the quarter was larger than expected. The yield issues are
likely related to the process learning curve as the company is bringing up
it 0.35 micron, five metal layer manufacturing process on a new design (the
K6) while simultaneously ramping the 0.25micron, K6 process for next year
at its Austin fab. On the positive side, we believe that the company is on
target for gradually improving manufacturing yields on the K6 to meet
approximately 2 million units in the fourth quarter, 1997 compared to 1
million units in the September quarter. Based on such projections we
expect the company to return to profitability in the fourth quarter,
however we are reducing our estimate for the third quarter from a loss of
$0.03 per share to a loss of $0.25-0.45 per share. We are maintaining our
fiscal 1998 estimate of $4.38 billion in revenues and $3.50 per share,
assuming rapid progress on the K6, with good yields and the smooth
transition to higher speed processors that rival Pentium II's performance
at the 300MHz level. Further, we look for follow-on products to the K6
with higher performance capabilities and additional top 10 PC OEM
announcements (IBM being the most recent) as the company reclaims about 15%
unit share in the PC processor market in 1998. Although Intel will likely
have moved about half of the PC processor market to the Pentium II in 1998,
there will still be a 50 million unit market for processors which plug into
the Pentium class Socket 7 motherboard (as opposed to the new, Slot 1
motherboard architecture for Pentium II). We believe that AMD can capture
30% of the available Pentium class market in 1998 by aiming at low-to-mid
range small office/home office users, value PC consumers and the
international PC market. We are also assuming a continuation of the
moderate well balanced recovery in the companies non-PC businesses:
telecom/networking, flash memory and PLD. We have a further update
following the conference call on Tuesday, October 7. Near-term we would
accumulate the stock on weakness and maintain a $45-50 target price based
on a multiple of 14x our 1998 EPS estimate of $3.50 and a 20% secular
earnings CAGR estimate. |
