From Albert, with ML report:
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08:12am EST 25-Nov-98 Merrill Lynch (T.Kurlak/J.Osha) AMD INTC INTC.O
ADVANCED MICRO:Opinion Raised: Sub $1000 PC Drives Recovery
ML++ML++ML Merrill Lynch Global Securities Research
ML++ML++ML
ADVANCED MICRO DEVICES (AMD/NYSE)
Opinion Raised: Sub $1000 PC Drives Recovery
Thomas P. Kurlak (1) 212 449-2308
Joseph Osha (1) 212 449-0930
25 November 1998
ACCUMULATE
Long Term
ACCUMULATE
Reason for Report: Opinion Raised
Price: $25 1/2
Estimates (Dec) 1997A 1998E 1999E
EPS: d$0.15 d$0.71 $1.55
P/E: NM NM 16.5x
EPS Change (YoY): NM NM
Consensus EPS: d$0.68 $0.99
(First Call: 13-Nov-1998)
Q4 EPS (Dec): d$0.09 $0.17
Cash Flow/Share: $2.60 $2.57 $5.30
Price/Cash Flow: 9.8x 9.9x 4.8x
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: C-3-3-9 to C-2-2-9
Mkt. Value / Shares Outstanding (mn): $3,748.5 / 147
Book Value/Share (Sep-1998): $13.41
Price/Book Ratio: 1.9x
LT Liability % of Capital: 41.0%
Est. 5 Year EPS Growth: 10.0%
Stock Data
52-Week Range: $31-$12 3/4
Symbol / Exchange: AMD / NYSE
Options: Pacific
Institutional Ownership-Spectrum: 51.1%
Brokers Covering (First Call): 23
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: Underweight (07-Mar-1995)
Growth: In Line (06-Apr-1998)
Income & Growth: In Line (06-Apr-1998)
Capital Appreciation: In Line (26-Aug-1997)
Market Analysis; Technical Rating: Above Average (25-Jul-1997)
**The views expressed are those of the macro department and do not
necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o Growth of low priced PCs drives K-6-2 demand.
o Earnings estimate raised 55% to $1.55 for 1999.
o Gross margin rising to mid 40's.
Fundamental Highlights:
o Over 50% market share of sub $1000 PC market where growth is
fastest.
o Strong Q4 seasonal pick up driven by consumer.
o Compaq, IBM, Hewlett-Packard dominate low end market with AMD
processors.
o Product technology improving, performance meets or beats
competition.
What Has Changed?
We have raised our investment opinion on AMD to reflect its considerably
improved competitive position in the microprocessor market, which is
driving
earnings to a higher than expected level in 1999. Our estimate has been
raised
from $1.00 a share to $1.55.
Sub $1000 PC
AMD has captured more than 50% of the consumer market for sub $1000
personal
computers with its K-6-2 processor. It shipped 3.8 million units in Q3
and is
expected to ship 4.8 million in Q4 for a total of 12 million in 1998.
This is
comparable to the 13 million units we estimate Intel (INTC, B-3-3-7, $110
7/16)
will ship this year of its Celeron low end processor.
Because of the good value of the K-6-2, AMD has essentially created the
sub
$1000 PC market and leading PC OEMs including Compaq, IBM, and Hewlett
Packard
are experiencing strong growth with their AMD based products. As a
result,
these three companies dominate the sub $1000 market. We also expect
another
domestic computer company to adopt AMD processors.
By AMD offering a processor that is about equal to the Pentium II at a
significant price discount, Intel has been forced to create a new low end
Celeron line in order to protect its Pentium II demand. Intel's attempt
to
segment the market, thereby hoping to prevent self impact of the Celeron
on its
higher priced PII, has left a large opening for AMD's K-6-2, which
industry
consultants believe surpasses Celeron in performance. This opening has
proven
beneficial to PC customers who see the attractive price/performance of
K-6-2
relative to Celeron PCs. The newest 400 MHz K-6-2 is priced well under a
comparable Pentium II.
Compaq has become an advocate for AMD partly because AMD's presence in
the
market keeps Intel's prices more competitive. But the performance of
AMD's
products has clearly been the main demand driver. AMD now competes head
to
head with Intel in the low to mid range and, with the new K-7 at 500 MHz
coming
next year, it will compete all across Intel's line up through the Xeon.
It now
appears that both companies have similar performance road maps; at least
for
the next two years, until the 64 bit Intel Merced debuts.
Profitability Improving
We have assumed that AMD's average processor pricing of $100 (compared to
$193
estimated for Intel) is maintained for purposes of estimating earnings
even
through some K-6's and the K-7 are priced well over this average. The
400 MHz
K-6 was just introduced at $283.
Profitability is improving and a gross margin in the low 40% range is
projected
for Q4 and 44% is expected in 1999, assuming no ASP increase.
Capacity
Microprocessors are expected to comprise 63% of AMD's revenues and most
of its
profits in 1999. Therefore, critical in H2 1999 is the question of
manufacturing capacity. Present capacity in Fab 25 (Austin) is
sufficient to
produce twice as many units in 1999 as will ship this year or up to 25
million.
In 2000, only about a 10-20% unit increase would be possible unless Fab
30
(Dresden) comes on line early in the year which can then take production
up to
40 million units in 2001. If AMD hits its earnings goals, it should have
adequate cash flow to fund equipping Fab 30 in 1999. Also, K-7
production
needs to come on smoothly in H2 1999 to avoid a K-5 type of shortfall.
The .25
micron design of the K-7 should yield well given AMD's experience on the
K-6.
A transition to .18 micron processing in 2000 will also be key to
reaching
higher unit output estimates mentioned above.
Potential
Selling 40 million units in 2001 is possible in our opinion given
projected
rapid growth of sub $1000 and $1000-$1499 PC markets and AMD's already
strong
position in those markets. If its $100 overall ASP is maintained, as we
believe it can be, AMD would more than triple its processor revenue's
from this
year's level to $4 billion. Indeed, AMD was the fastest growing major
semiconductor producer on a sequential quarter basis in Q3 at +30%
because of
the increase of K-6-2 sales.
K-7 Processor
A key to the market's acceptance of the high performance K-7 will be the
infrastructure support AMD gets for its Alpha bus interface and slot A
connector configuration. While mechanically identical to Intel's Slot 1,
Slot
A is electrically different and needs a different logic chip set. So
far, much
support has been forthcoming and CPQ appears to be championing this
effort.
This is continuing with the coming 450 MHz K-6 (Sharptooth). Some
industry
reports indicate this chip may outperform a 500 MHz Pentium II on NT 4.0
and
Windows 98. The K-7, with the higher speed Alpha bus and 3D Now is
believed to
outperform the coming Intel Katmai chips according to leading industry
reports
including Microprocessor Report. At 500 MHz, the K-7 will be a top
performer,
hence third party vendor support is logical to expect, in our opinion.
(INTC) The securities of the company are not listed but trade
over-the-counter
in the United States. In the US, retail sales and/or distribution of
this
report may be made only in states where these securities are exempt from
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usually
make a market in the securities of this company.
Opinion Key (X-a-b-c): Investment Risk Rating(X): A - Low, B - Average,
C -
Above Average, D - High. Appreciation Potential Rating (a: Int. Term -
0-12
mo.; b: Long Term - >1 yr.): 1 - Buy, 2 - Accumulate, 3 - Neutral, 4 -
Reduce,
5 - Sell, 6 - No Rating. Income Rating(c): 7 - Same/Higher, 8 -
Same/Lower, 9
- No Cash Dividend. |
