Positive article from DLJ Securities, read on.
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07:46am EDT 9-Sep-98 DLJ Securities (Charles F. Boucher, Ph.D.) AMD
ADVANCED MICRO DEVICES: AMD 3Q Strengthens; Raise Estimates, Reitera
DLJ ****** DONALDSON, LUFKIN & JENRETTE ****** DLJ
September 9, 1998 Charles F. Boucher, Ph.D. (415) 249-2277
Christopher F. Bunn, CFA (415) 249-2275
ADVANCED MICRO DEVICES (AMD: $15.125) ++#+
AMD 3Q Strengthens; Raise Estimates, Reiterate Buy
Range: Earnings Per Share 1998 vs 1997 % Chg
36.0 -12.75 Old New P/E Ratios MAR $(0.39) vs 0.09 NM
(FY:Dec.) 1999E $1.40 $1.44 13.0 JUN (0.45) vs 0.07 NM
1998E (0.89)(0.75) NM SEP E (0.05) vs (0.22) NM
1997A (0.15) NM DEC E 0.14 vs (0.09) +211%
Yield: NA% Market Cap.: $2.17 Billion 5-Yr. Growth Rate: 20%
Dividend: $NA Avg. Trading Vol.(000): 2,525 Book Value: $13.37
RATING: Buy Change: None 12-Mo. Target: $32.00
VIEWPOINT
Our checks have shown that Q3 sales for AMD have continued to strengthen.
We believe the company is seeing very good unit demand, and has been
successful in shipping its higher speed grades to customers, improving
blended ASP. The company's non-microprocessor divisions are running about
flat from the prior quarter in aggregate, which represents a slight
improvement from our prior view. We are raising our EPS estimate for Q3 to
a loss of ($0.05), and think the company has a fighting chance to reach
break-even. We reiterate our Buy rating and our $32 12-month target price.
IMPORTANT POINTS
o Recent checks show that AMD has continued to experience strong unit
demand for its K6-2 microprocessors in Q3, surpassing our earlier
expectations. We are increasing our unit assumptions to 3.8 million units
for Q3, leaving our 4.5 million unit estimate for Q4 unchanged.
o Microprocessor prices have remained firm this quarter, as overall
demand for microprocessors has temporarily strained availability.
o We think AMD is shipping a richer mix of processors due to continued
speed yield improvement. We believe the "sweet spot" of AMD's speed
distribution is 333MHz, and we expect the company to ship a few hundred
thousand units of 350 MHz processors. We think AMD is on track to ship 400
MHz microprocessors in Q4 and 450 MHz processors in Q1 1999.
o AMD continues to show steady progress with its microprocessor
products, with functional yields and speed yields improving, and good new
product development performance. We believe the Sharptooth enhancement to
the K6-2 is on track for a Q1 1999 launch, and recent K7 silicon has shown
better than expected functionality.
o AMD's non-processor product lines are performing in-line with
expectations thus far, approximately flat from the previous quarter.
o We are raising estimates for AMD for the September quarter and for
1999. We believe the company is making good progress toward profitability,
which we expect to be attained by Q4. We reiterate our Buy rating and our
$32 12-month target price.
INCREASED MICROPROCESSOR DEMAND
Recent checks have shown that AMD has continued to experience greater than
expected microprocessor demand during the September quarter. We think this
is due to a strong rebound in PC build rates by large OEMs and Asian
contractors as the PC industry rebounds from a disastrous second quarter
and responds to continued healthy channel sell-through as we move into the
seasonally strong fall and Christmas selling seasons. AMD has continued to
capture market share, in our view, and has continued to improve its product
line-up to remain very performance and price competitive in the consumer PC
market. Newspaper ads by most major retail PC stores prominently feature
aggressively priced systems from Compaq, IBM and HP featuring the AMD K6-2
processor with 3Dnow!, and the systems appear to be selling well.
Microprocessor prices have remained firm throughout the quarter, we believe
due to the relatively sharp rebound in PC component demand temporarily
straining current microprocessor supply. We think AMD has benefited from
the incremental price firming, with a positive effect on blended ASP. We
think AMD is shipping a richer mix of microprocessors, as its speed yield
has increased to a "sweet spot" of 333MHz, with some yield to 350MHz. We
estimate that AMD will ship a few hundred thousand 350 MHz K6-2 processors
in Q3, which will greatly help the blended ASP. We think AMD can achieve a
blended ASP of at least $100, possibly higher, and enjoy a degree of price
stability, because AMD's distribution of speeds overlaps Intel's to a large
extent.
We further believe that AMD has continued to make good progress with its
speed distribution, and is on track to ship 400 MHz K6-2 products in Q4,
and 450 MHz processors in the first quarter of 1999. This schedule will
keep AMD within about 1-2 speed grades of the top of Intel's mainstream
microprocessor product line, which should allow AMD to maintain stable
blended ASP at or above $100.
NON-PROCESSOR BUSINESSES SHOWING IMPROVEMENT
AMD's non-microprocessor businesses, in aggregate, appear to be tracking
expectations for flat revenue from the previous quarter. We believe the
networking and communications component division has shown recent
strengthening, particularly for networking hub products. We think that the
Vantis programmable logic subsidiary and the non-volatile memory divisions
are trending flat-to-up in the quarter so far, resulting in overall non-
processor revenue likely to be at least flat sequentially.
MICROPROCESSOR EXECUTION LOOKS GOOD
We think that AMD enjoys its strongest competitive position in the
microprocessor market in several years. Quite simply, AMD has a competitive
performance microprocessor architecture, an enthusiastic customer base, and
good manufacturing yields to meet the growing demand for its product. We
believe these are the essential requirements for success in the
microprocessor market. Furthermore, AMD has a product roadmap that, if
successfully executed, should result in ongoing competitive strength for an
extended period of time. The company's K6-2 with 3DNow! processor combines
Pentium II-class performance with enhanced 3D performance from a set of
microcode extensions that are roughly comparable to Intel's upcoming MMX2
enhancements. The K6-2 device competes very effectively with Intel's
Pentium II processor at speeds up to 350MHz, with 400MHz and 450MHz
upgrades slated for Q4 1998 and Q1 1999, respectively.
AMD's Sharptooth processor, which integrates 256K of secondary cache
memory onto the K6-2 processor, is on target for a Q1 1999 introduction. We
believe the product is essentially ready to ship, but is being held off the
market until the first quarter of 1999 to avoid product confusion during
the Christmas selling season.
The next generation K7 processor has generated first silicon, and is
scheduled for sampling by the Fall Comdex show in November. We have heard
that the K7 has generated surprisingly good functionality, and is running
at 450 MHz and higher speeds. We believe the company is ahead of plan with
the K7, and is committing significant design resources to ensure that the
product is ready for an early 1999 launch date. For the first time in our
recollection, AMD is achieving design milestones ahead of schedule rather
than continually falling short of its commitments. We think this is a very
positive change in the company's business model.
We think this roadmap will keep AMD well positioned versus Intel, which
should allow the company to maintain relatively stable blended ASP while it
grows its market share. This is critical if AMD is to deliver consistent
revenue and earnings growth from its microprocessor division.
RAISING ESTIMATES, REITERATING BUY
We are increasing our microprocessor unit assumptions for AMD to 3.8
million units and leaving our ASP assumption unchanged at $100, although we
believe there may be a few dollars upside to this estimate. Our revenue
estimates for the non-microprocessor divisions are upgraded to flat from
our previous view of a slight aggregate sequential revenue decline. We are
increasing our revenue estimate to $680 million, led by sharp sequential
growth in microprocessor revenue. We expect substantial improvement in
gross margin and operating margin, bringing the company's operating
performance close to break even. We are raising our estimates accordingly,
with Q3 EPS improving to a loss of ($0.05), with profitability regained in
Q4 with an EPS estimate of $0.14. We are raising our 1999 estimate to
$1.45. Given the very depressed valuation of the stock, we think
substantial near-term upside potential exists as investors recognize the
strong earnings growth potential the company has. We reiterate our Buy
rating and our 12-month target price of $32.
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+ WITHIN THE PAST THREE YEARS DONALDSON, LUFKIN & JENRETTE
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THE COMPANY'S SECURITIES.
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JENRETTE SECURITIES CORPORATION OR AN AFFILIATE IS A DIRECTOR OF THIS
CORPORATION. |
