Gene - Morgan Stanley/Edelstone - AMD
Sorry - the last prediction I posted wasn't Edelstone's last.
He's had a chance to screw up some more - even after the AMD yield crisis became public.
Check out this report (posted at Morgan Stanley/DW)
Paul
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08:01am EDT 12-Sep-97 Morgan Stanley\DW (Edelstone, Mark (415) 576-2381) AMD
ADVANCED MICRO DEVICES: UPGRADING TO STRONG BUY; MEETINGS WITH
AMD...
Advanced Micro Devices (AMD): Upgrading To Strong Buy; Meetings...
Mark Edelstone/John Cross/Louis Gerhardy (415) 576-2381/2382/2391
Industry: Semiconductors Date: September 12, 1997
Type: Recommendation Change
______________________________________________________________________
Rating: Strong Buy Price: 34 1/8
52-wk Range: $49-$13 Price Target: 60
______________________________________________________________________
FY Ends ----EPS---- Rel. P/E
Decembe Curr Prior P/E (S&P 400) Pr/Bk
r
96A ($0.64) NM NM 2.3x
97E $0.55 62.1x NM 2.2x
98E $4.00 8.5x 40% 1.8x
______________________________________________________________________
Qtrly ---- 1Q ---- ---- 2Q ---- ---- 3Q ---- ---- 4Q ----
EPS Curr Prior Curr Prior Curr Prior Curr Prior
96A $0.10 ($0.33) ($0.26) ($0.15)
97E $0.09A $0.07A $(0.03) $0.42
98E $0.64 $1.02 $1.06 $1.28
______________________________________________________________________
5 Yr. EPS Growth: 20% Debt to Equity: 34.6%
Dividend: None Mkt Cap./Rev: 126%
Shares Outst.: 147.9 MM Mkt Cap.: $5,048 MM
______________________________________________________________________
DETAILS
Following meetings with members of Advanced Micro Devices' (AMD)
management team, we are comfortable with our expectations for the K6
microprocessor (MPU) product ramp. Although lower-than-expected
yields during the company's aggressive production ramp has prevented
AMD from maximizing its upside production potential in the current
quarter, we still expect the company to triple its unit shipments in
the third quarter and double them again in the fourth quarter.
Based on the stock's low valuation parameters and our expectations for
significant earnings leverage as the K6 product cycle unfolds during
the next four to six quarters, we have upgraded our rating on AMD to
Strong Buy from Outperform. Our 12-month stock-price target remains
$60, and we expect AMD to find solid support in the low 30s.
K6 Demand Is Strong And Unit Shipments Should Increase Significantly
Before The End Of The Year...
AMD shipped 370,000 K6 MPUs in the second quarter for $100 million,
and based on strong demand and an aggressive production ramp, we
believe the company will triple its unit shipments in the current
quarter and double them again in the fourth quarter. Based on these
unit assumptions, we expect AMD's MPU revenues to increase to $190
million and $340 million in the third and fourth quarters,
respectively. We believe overall demand for K6 is strong, and Acer,
DEC, Fujitsu/ICL, IBM, Siemens Nixdorf, and Vobis have announced
products that use K6. We expect additional top-20 OEMs to make K6
product announcements before the end of the year, and based on AMD's
current production run rate of around 150,000 units per week, we
believe the company should be able to produce enough units to meet our
fourth-quarter expectations.
...And AMD Should Enjoy Significant Earnings Leverage As Its K6
Shipments Increase
Due to the fixed-cost nature of its business model and the significant
amount of overhead associated with Fab 25 in Austin, Texas, AMD's MPU
operations have been losing money since the second half of 1995.
Although we expect AMD's MPU average selling prices to be pressured by
competition from Intel, we believe K6's small die size will generate
attractive margins as soon as Fab 25's production ramp stabilizes and
start up costs are normalized, which should happen before the end of
the year. We currently expect AMD's MPU business to turn profitable
in the fourth quarter, and based on our expectations for MPU revenues
of around $2.2 billion in 1998, AMD should enjoy significant margin
expansion and earnings leverage as the K6 product cycle unfolds next
year.
We Believe The Upcoming Transition To 0.25-Micron Production Is The
Primary Risk To 1998 Estimates...
Although the success of AMD's flash memory, PLD, and communications
product lines are clearly important to the company's ability to
maximize earnings next year, we believe our 1998 earnings estimate of
$4.00 per share (versus a consensus estimate of $2.48) is highly
dependent on the success of K6. In order for AMD to meet our 1998
earnings estimate and validate our investment thesis on the stock, we
believe the company must execute the transition to its 0.25-micron
process technology on a timely basis. All of AMD's K6 production
currently uses a 0.35-micron process, however, the company is
currently sampling K6s manufactured with its 0.25-micron process.
Although AMD is probably one to two quarters behind Intel, we expect
volume production of its 0.25-micron process technology to commence
soon, with initial shipments of 300 MHz K6s towards the end of the
fourth quarter. We currently expect AMD to have completed the
transition to its 0.25-micron process technology around the middle of
next year, and as the transition unfolds, the company should be able
to more than double its production and enjoy more than a 50% decrease
in its K6 unit cost. In addition, AMD should be able to increase the
performance and functionality of its K6 product family with its 0.25-
micron production. We believe AMD will be able to produce 15 million
K6s next year, however, a relatively smooth transition to its 0.25-
micron process technology is key to our 1998 earnings estimate, and it
is an integral part of our investment thesis on the stock.
_And Multiple Expansion Should Occur As The K6 Cycle Unfolds--
Upgrading AMD To A Strong Buy
Despite AMD's inability to maximize its K6 opportunity in the current
quarter, we believe a healthy demand profile and the company's ongoing
manufacturing improvements will still support significant operating
leverage and explosive earnings growth as the product cycle unfolds
throughout next year. Based on our 1998 estimates for AMD and our
calendar 1998 estimates for more than four dozen semiconductor
companies, AMD is trading around a 60% discount to the price-to-
earnings (P/E), price-to-sales (P/S), and price-to-book value (P/BV)
multiples of the average semiconductor stock. AMD's stock has
performed very well since 1991 when its MPU business was performing
well, and we believe the stock will enjoy a strong advance and
multiple expansion as the K6 ramp unfolds and AMD's earning power
expands.
Based on current valuations and our expectations for a strong K6
product cycle, we have upgraded our rating on AMD to Strong Buy from
Outperform, and our 12-month stock price target of $60 suggests the
stock should be fairly valued at a 25%-30% discount to the 1998E P/E
and P/S multiples for the average semiconductor stock. Since the
level of profitability within the MPU business is significantly
greater than most other product lines in the overall semiconductor
industry, we believe our projected valuation parameters will prove to
be conservative if AMD brings a competitive K7 MPU to market in early
1999. We expect AMD to find solid support in the low 30s, and we
believe the more than 20% decline in the stock versus a relatively
unchanged stock market since AMD announced that IBM would use its K6
MPU on August 18 has already discounted the company's negative third-
quarter earnings surprise. |
