All - LB UPDATE - raed it
04:41pm EDT 1-Oct-97 Lehman Brothers (M. A. Gumport, CFA 1(212)526-5368/) AMD
Adv. Micro Dev: Further Elaboration on Yield Problem
Ticker : AMD Rank(Prev): 1-Buy Rank(Curr): 1-Buy
Price : $27 3/8 52wk Range: $49 - 14 Price Target: $ 43
Today's Date : 10/01/97 @2:45pm
Fiscal Year : DEC
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EPS 1996 ----1997-------- ----1998-------- ----1999-------
QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr.
1st: 0.18A@ 0.09A 0.09A 0.25E 0.25E 0.45E 0.45E
2nd: -0.26A@ 0.07A 0.07A 0.37E 0.37E 0.50E 0.50E
3rd: -0.28A@ -0.36E -0.36E 0.43E 0.43E 0.55E 0.55E
4th: -0.15A@ 0.20E 0.20E 0.55E 0.55E 0.75E 0.75E
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Year:$ -0.51A@ $ 0.00E $ 0.00E $ 1.60E $ 1.60E $ 2.25E $ 2.25E
Street Est.: $ 0.42E $ 0.42E $ 2.34E $ 2.34E $ ----E $ ----E
E-Estimate. @-Includes: 1Q96 $-0.06 merger, $+0.18 stock sale; 2Q96 $+0.07
capital gain; 3Q96 $-0.03 layoff; 4Q96 $-0.01
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Return On Equity : -1.8 % Revenue (1997) : $ 2.57 Bil.
Shares Outstanding : 147.9 Mil. Proj. 5yr EPS Grth : NM
Mkt Capitalization :$4048.8 Mil. Dividend Yield : 0.0 %
Book/Price to Book : $14.13; 1.94x P/E FY97, FY98 : NM ; 17.1x
Net Cash Per Share : $-1.22 Convertible : NO
Disclosure(s) : G
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** EXPECT AMD'S STOCK TO BOTTOM IN THE $25 RANGE IN COMING WEEKS COINCIDENT
WITH ANNOUNCEMENT OF MAJOR NEW CUSTOMERS.
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THE BAD NEWS: IT'S TRUE, YIELDS ARE STILL LOW, NEW 3Q97 EPS MODELS WILL NEED
TO INCLUDE LOWER SALES PROJECTIONS; 4Q97 EPS PROSPECTS MAY STILL BE AT RISK.
After discussions with management, it appears K6 yields went down in July-
August, improved only moderately in September, and a further round of fixes
will not be in place for another month. Additionally, the speed mix took a
step backwards: In late June almost 50% of parts were 233 MHz, but parts now
are largely 166 and 200 MHz (list price today: 233s $290, 200s $189, 166s
$109), so ASPs likely will be roughly $140-150 instead of our recent $182,
hence the impact on sales revenues (despite shipping, as recently expected, 1
mil. units) and the disproportionate EPS shortfall.
THE GOOD NEWS: EVERY K6 MADE HAS SOLD, AND SALES HAVE BEEN MADE ESSENTIALLY
AT LIST PRICE; EXPECT AMD TO MEET/BEAT ITS COMMITMENT TO ANNOUNCE 1 MORE TOP
10 AND 1 MORE TOP 20 ACCOUNT BEFORE YEAR END. AMD, of course, already has
announced K6 orders from IBM, Fujitsu/ICL (UK; we hear Fujitsu-Japan will
shortly begin production, too), Acer, NEC Japan among the top 10 and DEC,
Vobis, Trigem, and Peacock among the 2nd 10 desktop PC OEMs (they also have
largely conceded the unlikelihood of landing Packard Bell or Dell). Key
remaining top 10 accounts are Compaq, HP, and AST. WE HAVE EXPECTED AMD TO
WIN K6 ORDERS FROM EITHER HP OR AST BEFORE YEAR END, BUT WE NOW HEAR CREDIBLE
REPORTS (NOT FROM AMD) THAT COMPAQ WILL SIGN ON, TOO.
WE ARE CAUTIOUS ON SHORT TERM PROSPECTS AT AMD. Consensus projections have
been very high, reduced estimates are still being digested by the market,
yield problems cannot be resolved for another month (and could easily still
have a larger impact than we have indicated on 4Q97 results). ...(Cont'd)
AMD (Cont'd) p.2
DESPITE SHORT TERM CAUTION, WE BELIEVE $25-$27 WILL APPEAR IN RETROSPECT AN
EXCELLENT PRICE AS AMD COMES ROARING BACK IN THE NEXT 6 MONTHS. Yield
problems have, from time, hurt every chip maker, and we fully anticipate AMD
to resolve its problems at worst within a few months. Despite yield problems,
AMD has already begun 0.25 micron production, and we believe there is no "show
stopper -- ya just can't do that, not now, not ever" issue. WE DO ANTICIPATE
THE ANNOUNCEMENT OF MAJOR NEW CUSTOMERS IS IMMINENT AND THAT, WITH THOSE
ANNOUNCEMENTS, AMD WILL HAVE PASSED THE BOTTOM.
WHAT DO AMD's PROBLEMS MEAN FOR OTHER COMPANIES? NOT MUCH. We believe the
chip industry paused during the summer and is moving into a period of slow but
more sustainable growth. That said, the words we would underline are "ongoing
recovery". In August 1996, worldwide IC unit volume was down 7%! In July
1997, worldwide IC unit volume was up 35%! We believe an inventory correction
is long over and that heavy exposure to chip stocks continues to make sense.
We are particularly focused on companies with strong, long term improving
trends such as Texas Instruments (TXN - 131 1/8; rated 1)and SGS-THOMSON (STM
- 91 3/16; rated 1) among large cap companies and leading smaller companies
likely to post solid EPS progress such as Vitesse (VTSS - 48 1/2; rated 1) and
Lattice (LSCC - 63 7/8; rated 1). Also, we continue to believe International
Rectifier (IRF - 22 9/16; rated 1) has surprisingly good momentum, and Xilinx
(XLNX - 47 7/16; rated 1) outstanding quality. We are cautious short term on
the commodity memory sector where overcapacity near term still appears to be
an issue.
BUT MPUs ARE NOT OUR KEY FOCUS. AMD's problem (yield) is largely AMD's
problem. Price does not appear to be the key issue. Still, we believe the
MPU market is very changed from 3 years ago, when INTC's (INTC - 91; rated 2)
market share bottomed and began to move up. Now, INTC's share is moving down.
Some would argue that the 2Q97 EPS shortfall at INTC strictly resulted from
INTC shooting itself in the foot (with regard to a mismatch of sales and
production of MMXs); but we would argue that, if INTC shot itself in the foot,
it did so trying to get the gun out of the holster to shoot AMD. We see a
similar issue with the recent Tillamook processor introduction. From all
reports, notebook makers have too many 166 MHz parts to move forward
aggressively with the Tillamook. Yet, the premium notebook buyers now have
all stepped back from the market. Meanwhile, INTC is on a pricing curve much
more aggressive than anything seen in the past 3 years. It is hard to
quantify the impact of these issues, and we still have no real visibility on
INTC's near term earnings, but we no longer believe that multiples at INTC
near term are going up. |
