Re: Shift in fundamental analysis
I can understand why you might perceive this as a shift, so let me explain a little further. I upgraded AMD to a Strong Buy last summer when it got under $15 because at that level, there was >35% potential gain to my target price at the time. It was lowered last fall to a Buy at about $20 and then to a Hold at $25, when it was within 5% of my target (which, if I recall correctly, was at $26 by that time [the target grows over time to either reflect the estimated EPS growth rate or, as in the case with a stock such as AMD, at the rate that I use to discount a 5-year EPS estimate).
When the 1998 year was reported, my five year forecast shifted from 2002 to 2003. It was (and is) my contention that AMD is suffering the fits and starts that accompany the beginning phases of a long-term process (because I don't consider the second-sourced 386/486 period AMD a true MPU vendor, which began only with the ill-fated K5). As I am a believer that AMD is closing the product performance gap with Intel and that the K-7 would accelerate the process, the comfort level with the out-years was higher. I was also additionally intrigued by the SMP chip set being developed by Poseidon Technology, which has gotten an increasing amount of media coverage over the past couple of months. As a result, my 12-month target moved to $40, which led to an upgrade to Strong Buy at $29.50 or below.
My earlier statement today reflected not so much a change in my take on the fundamentals as a disappointment with management's handling of the situation on the investment side. I believe that their understanding of the range of possible outcomes should have led them to take a public stance that incorporated more of the negative possibilities than they did, which would have precluded the loss of "face" that goes with a third preannouncement.
I guess what threw me most about all this was that it seemed to me that the Gateway announcement (which now seems about five years ago) was something that I thought would have been based on their own due diligence that product would not only be at appropriate performance levels, but also available in requisite quantities. Given AMD's history, a new customer could be expected to display a certain skepticism in these matters and would therefore make a public commitment only after its concerns could be allayed by means of close inspection.
So I don't hold the difficulties of high technology against a management team. But the difficulties of investor relations should be considered easier to manage and executives should be held to an appropriately high standard. It's my intention to pass these thoughts on to AMD's management tomorrow when I return to the office.
A note on my rating approach. If it were up to me, I'd have no ratings, just a 12-month target to calculate the potential gain and a second factor that attempts to quantify the risks of the potential gain. One way I adjust for the risk in my current system is to use a premium to the growth rate when calculating the multiple when companies deserve it (e.g., a 30% premium to Intel's estimated 20% EPS growth rate to reflect its relative financial strength and earnings consistency). AMD doesn't rate any premium. An obvious observation is that in the current market, size and consistency are being given enormous premia. I believe that as we enter the heart of an industry upcycle over the next several quarters, investors will reduce such premia and begin to pay up for what are clearly second-tier companies in the industry. It's interesting that my valuation methodology has led to upgrades to several such leveraged companies over the past few months as well as downgrades of some of the premier companies (such as ALTR) that we had Strong Buys on six months ago at prices less than one-half of Friday's levels. While not at all appropriate for trading, this methodology seems to work well for a longer time period such as 12 months. In terms of my role as a sell-side analyst, it does serve to differentiate my work from most of my competitors, who primarily traffic in news tidbits du jour and tend to have their ratings move in reaction to news instead of anticipating it. I believe that's why so many ratings move up in tandem with the stock price. - Tad LaFountain |
