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Technology Stocks : Advanced Micro Devices - Moderated (AMD) -- Ignore unavailable to you. Want to Upgrade?

To: Robert Salasidis who wrote (60725)	10/28/2001 7:48:02 PM
From: niceguy767	Respond to of 275872

Robert: "As for INTC earnings - they are in the black while major plant expansions/upgrades are being undertaken" Enjoy the black while you can...Extrapolating on the current pace of financial demise at INTC, it won't be long before "Big Red" rears its ugly head at INTC...

To: Robert Salasidis who wrote (60725)	10/28/2001 8:14:33 PM
From: Dan3	Respond to of 275872

Re: As for INTC earnings - they are in the black while major plant expansions/upgrades are being undertaken. On paper, perhaps, but there are acquisition and Property, Plant, and Equipment (PP&E) costs that have been "creatively accounted" for by Intel. There are two categories on Intel's balance sheet that should be considered by anyone tracking the company - especially in light of the action recently taken by NT. The first is Goodwill. Goodwill can be taken by a company when it feels that there is intangible value in an acquisition that isn't reflected in a simple listing of its PP&E. The classic example of this would be if someone were to buy Coca-Cola company. Because a bottle of cola with the Coke label can be sold for more than a bottle of Dave's cola or Dan's cola, there is something more to buying a plant that has the right to such labeling. The other intangible often considered is the value of a company's reputation and relationship with its customers. If that plant didn't have the right to label its cola "Coca-Cola" but did have a good relationship with several large chains and was private labeling products for those chains, the plant would be worth somewhat more than a new plant built by a new entrant into the business. So that's "goodwill." It's both goodwill in the classic sense, and things like licenses, brand names, and copyrights. Intel has gone from nearly no goodwill on its balance sheet, to roughly $6 Billion on its balance sheet since 1999. Those entries were made to account for the profits expected to come from the value of the name brands, labeling, and production rights picked up when Intel bought those companies that have been put into the "other" category. Given the losses that keep coming from the other category, my conclusion is that Intel acquired nowhere near the $6 Billion in goodwill they claimed on their balance sheet, and that the money expended on those purchases is basically gone. They have decided to defer those costs, instead of taking a writedown, and that's why I consider that "goodwill" to be an expense already incurred but not taken. You can treat it however you'd like. The other part of their balance sheet that I find deserving of scrutiny is their undepreciated PP&E. Note that this is in addition to their goodwill. Undepreciated PP&E is a company's assessment of what it's PP&E is presently worth. Note that a company can write down the value of it's PP&E without regard to tax laws - it just can't deduct more than a fixed amount. In a period in which Intel's PP&E is generating 25% less revenue, Intel is claiming that the value of that PP&E is 20% greater than it was the year before. The present economic conditions are extreme, and it is reasonable to think they will improve, and that the revenue Intel's PP&E will generate will increase next year, but it would take a 60% increase in revenue to account for the difference in valuation. It's actually not quite as ugly as it sounds, being down 25%, it would take a 33% increase to bring them back to last year's revenue, and a 20% increase on top of that to match the 20% Intel has increased its assessment of its PP&E value. 1.33 x 1.2 = 1.596 or 60% increase. Do you think Intel's revenues will be 60% higher next year than they were this year? If you do, then their balance sheet is correct and they reported a reasonable share of their actual costs when they calculated their earnings. If you don't think Intel's revenues will be 60% higher next year, then they probably should have accepted as costs more of the PP&E costs they incurred during this year. My own interpretation is that the fierce competition with AMD, coupled with permanent reduction in demand relative to 1999 (no more Y2K looming over the horizon), resulted in a chunk of Intel plant becoming worthless and Intel being forced to replace that plant ahead of schedule. Those were real costs they incurred and they covered those costs with real money, but they didn't include those costs in their earnings calculations. And that's how they reported a profit for the year, while their balance sheet was eroded by $9.5 Billion dollars. Intel isn't violating any laws, but they have begun the process of "hollowing out" that is periodically seen when a company reports good earnings year after year, then suddenly has to take a huge writedown that leaves it nearly worthless. Intel is hoping for several bonanza years in which it can take those extra costs it incurred this year and last year without reporting a big loss. And it doesn't look like there are any bonanza years coming soon. I don't think things are all that bad for Intel, but they aren't nearly as good as their quarterly reports seem to indicate, either. Intel is either going to keep taking large charges for the 2000/2001 costs for 4 more years, which will make if much harder to report a decent profit, or they will have to take a big 1 quarter writedown, with a dollars per share loss for the quarter. Either way, I see those balance sheet issues as hanging a big question mark over Intel. Compare that with AMD's accounting, where they performed a physical and accounting restructuring this quarter, taking as costs this quarter expenses that won't be incurred until next quarter. AMD wrote down the value of its old plant and took costs for closing it. AMD has also been depreciating their current plant as rapidly as they've been spending on it. By taking costs as they are incurred, and writing down plant as worthless as soon as it becomes worthless, AMD is in a better position to report profits when the semi market picks up. Intel, on the other hand, will first have to own up to the costs of its acquisition binge and the fact that some of its old plant has also become worthless.