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

To: Joe NYC who wrote (226579)	2/21/2007 5:17:04 PM
From: pgerassi	Read Replies (1) \| Respond to of 275872

Dear Joe: Intel is not slowing wafer starts yet. If they do, they will have under utilization charges which will drop earnings even more. Fabs that don't produce as much still have depreciation charges. And those are actually lower than what the equipment really loses in value. An idled fab also means that you are spending money to lay off workers who then need some time to get back up to speed when you reactivate them. If you close the fab, then the employee charges are even higher over the short term (unemployment, added benefits, etc.). Those overseas plants in places like Ireland and Israel require long closure notices which means even higher costs. Similar to what would happen to AMD in Dresden, if AMD needed to lower capacity which I don't forsee anytime in the near future (<5yrs). Cost of sales goes down a little, but nowhere near what revenue does. Thus GMs fall and this falls straight down to earnings. That is what the inventory increase has been hiding. The other thing Intel should have been doing is writing off inventory because the underlying CPUs are losing their value and that is dropping below their marginal costs. Thus inventory has to be revalued at what the chips are worth, not the higher production cost. Intel did have a small $100 million dollar writeoff a few quarters ago, but it was overwhelmed by other inventory increases. Another reason is that most of that inventory appears to be held as WIP. That is because quite a bit are finished dies that have yet to be packaged. The latter would increase the costs but, I feel that Intel values these like packaged CPUs minus packaging costs rather than unpackaged dies of lesser worth. Certainly if they were packaged as a PD2060 minus the cost of packaging would be less than $10. But valueing them as a Pentium 955 minus the same packaging costs divided by two at $50 so that it is higher than the production costs, is yet another way of unjustifiably raising inventory value. Intel has been known to pull all three tricks over the last few years. Now if they actually reduce wafer starts to actually sell this inventory rather than write it off or dump it, they have to reduce production below demand. Given the size of the inventory substantially below like half to get rid of it before the end of the year. Now that is shutting down 3 or 4 big fabs of theirs at about $0.10-0.20 in net charges each. That puts their losses at $0.16 to $0.56 a share for three or more quarters running. Which would you rather they do? Take an immediate one time charge of $0.50 a share and lower ongoing earnings by about $0.10 (have an EPS of $0.14) or lose $0.16 a share every quarter for over a year? I would choose the former overe the latter because the former is more certain. The latter could be made worse by AMD. What would Intel shareholder's do if Intel was losing money and still losing market share while AMD was earning money? They would clamor for management's heads. In the former of writing the inventory off and closing a 65nm fab to bring production into line, management may be excused for taking the hit. Yes the stock would drop but, it would make all existing options worthless (management is seen taking a hit to their own pocketbook as long as they didn't dump or exercise before the warning), being better positioned in the future (by closing or selling some additional divisions and EOLing less profitable products like Itanium) and, of course, lots of PR spin. So yes, inventory is a ticking time bomb and in more ways than you appear to regard it. Pete