Brian, All - pru upgrade
08:38am EST 31-Mar-98 Prudential Securities ........
AMD: UPGRADING TO BUY FROM HOLD. MOMENTUM BUILDING, EQUITY INVESTMENT
We are upgrading AMD to Buy from Hold with a price target of $35. In our view,
the two key reasons for our cautious position on the company have been addressed
and should allow the company to effectively compete in the attractive x86
processor market going forward. Specifically, 1) we now believe AMD in short
order will receive a large cash infusion in the form of a 20% or greater equity
investment by a major electronics OEM, potentially IBM, which addresses the
company's severe cash problems. 2) We believe yield improvements which we
discussed in our March 12th note are being accelerated through the fab and may
have a fuller impact in the second-quarter than we had originally estimated.
Equity Investment Will Be Key
Our industry sources indicate AMD has finalized an agreement with a major
electronics OEM to take an $800 million or greater equity stake in the company.
Speculation that IBM may be this investor is a good possibility since it would
make strategic sense for IBM as a vehicle to continue and assure its presence in
high volume PC processors. The recent foundry agreement signed by AMD and IBM
is a good first step. The announcement could occur on or before next week's
first-quarter conference call.
Schedule 14A Outlines Meaningful Change Of Control Arrangements
The very recently published DEF 14A Definitive Notice and Proxy Statement
indicates AMD has entered into management continuity agreements with each of its
executive officers. Essentially, should a change of control occur (defined as
more than 20% of voting power of outstanding shares), the executive officers are
very much assured of lucrative golden parachutes within two years of the change
of control. We think the timing and content of this 14A is interesting to say
the least.
Inroads at Compaq
We believe that AMD is solidifying its position at Compaq after getting a key K6
socket (win) a few months ago in one of Compaq's higher end sub-$1K PCs. Our
industry checks indicate continued success for AMD at penetrating Compaq.
Its All About Yields
Improved K6 yields (number of good die per wafer) at 0.25 micron geometries in
AMD's Fab 25 in Austin, TX was the all or nothing bet AMD made last December.
It appears to have paid off. We believe AMD's ramp is progressing very well.
We estimate AMD is now producing 300K K6 processors per month with a very steep
ramp into the second-quarter positioning AMD to ship over two million K6
processors in the second-quarter. Furthermore, we believe K6 processors to be
yielding at 300 MHz, which is critical for AMD to be competitive with Intel in
the second half of 1998.
Slot 1 vs. Socket 7: Does Socket 7 Have Any Life In the Second Half of 1998?
While we do not dispute the inevitability of the Slot 1 interface, which is used
for Intel PII processors, the older socket 7 used for Pentium compatible
processors has some life in it yet. Both Compaq and IBM should help extend the
life of socket 7 long enough, in our view, for AMD to offer their "Slot A"
version of the Slot 1 sometime in early 1999.
We are revising our first-quarter 1998 revenue and EPS estimates to $550 million
and $(0.37), from $610 million and $(0.26) respectively. Our new 1998 revenue
and EPS estimates are $2.8 billion and $0.02, from $2.7 billion and $(0.30)
respectively. Our new 1999 revenue and EPS estimates are revised upward to $3.4
billion and $1.50, from $3.2 billion and $1.00 respectively.
AMD clearly has had a mixed track record regarding x86 microprocessors. We now
believe that the momentum is now in the company's favor given our expected cash
infusion and significantly improved K6 yields. We are upgrading AMD to Buy from
Hold. We are establishing a 12-month price target for the stock of $35. |
