Commentary

Valuation: Advanced Micro Devices (AMD)

Written by Andres Romero

Company Profile: Advanced Micro Devices Inc. (obtained via Google Finance)Advanced Micro Devices, Inc. (AMD), incorporated on May 1, 1969, is a global semiconductor company with facilities worldwide. The Company provides processing solutions for the computing, graphics and consumer electronics markets. During the year ended December 31, 2006, the Company offered primarily x86 microprocessors, for the commercial and consumer markets, which are used for control and computing tasks, and embedded microprocessors for commercial, commercial client and consumer markets. On October 25, 2006, the Company completed the acquisition of ATI Technologies Inc. (ATI). As a result of the acquisition, the Company began to supply three-dimensional (3D) graphics, video and multimedia products, and chipsets for personal computers (PCs), including desktop and notebook PCs, professional workstations and servers, and products for consumer electronic devices, such as mobile phones, digital television and game consoles. The Company operates through four segments: Computation Products, Embedded Products, Graphics and Chipsets, and Consumer Electronics.

Business and Management Review

1) Is the business simple and understandable?

Advanced Micro Devices is a firm that provides desktop, notebook, server, workplace processors and chipsets that innovates the needs of their commercial and consumer markets. Their business is easy to understand as they generate and supply their products to computing, wireless and consumer electronics companies worldwide.

2) Does the business have a consistent operating history?

Since the company went public in 1972, AMD has been a pioneer in the graphic design industry by being the main semiconductor for companies such as Intel, IBM and Microsoft. Their history had been full of success as they had introduced chipsets and processors that had played a big role in the success of the main PC Corporations. For the past seventeen years they had merged and expanded their operations worldwide as globalization had been a serious factor in this business.

3) Does the system have favorable long term prospects?

Technology has been taking over all sectors of the business world. As long as this trend persists AMD will have favorable prospects.

4) Is management rationale?

We are not impressed much with this company’s management. AMD third quarter earnings reported, last October 18th 2007, an 18 percent revenue increase compared to the second quarter of 2007 and a 23 percent improvement compared to the third quarter of 2006 due to increased microprocessor unit shipments, manufacturing efficiencies, improved inventory management, and a richer product mix in the Computing Solutions and Graphics segments. Moreover, its balance sheet is standard as shows constant increase in assets and liabilities. On the other hand, its current ratio is low compared to the industry meaning that they do not carry much liquidity in their books. Furthermore, their Cash Flow Statement shows poor performance in their investment activities as we believe management have not made wise decisions to devote AMD’s capital. The company’s income statement has been unstable, which we believe was caused by high production and operating expenses. However, the company has begun to outsource their input expenses to other parts of the world as AMD is constantly expanding. Finally, AMD shows negative Return on Equity, Return on Assets, Net Profit Margin, Operating Margin and EBITDA Margin which leaves a lot to say about the management role of this company.

5) Is management candid with its shareholders?

AMD contains a decent amount of investor information within its website. The company keeps investors posted of any activities by including a list of upcoming as well as past events.

6) Does management resist the institutional imperative?

We are undecided if management resist institutional imperative due to the lack of dividends paid by their stocks and the below industry growth rate.

Financial and Value Review

Defensive

1) Size of firm

The firm does have market cap greater than two billion dollars, therefore this test passes. “Pass”.

2) Strong financial condition

AMD current ratio is lower than 2, so this test fails. “Fail”.

3) Earnings stability

The company does not have positive net income for the previous ten years, as a result this test fails. “Fail”.

4) Dividend record

AMD does not pay dividends. “Fail”.

5) Earnings growth

Advanced Micro Devices does not have a 1/3 increase in its EPS for the past 10 years. “Fail”.

6) Price to earnings analysis

This test passes as they have a PE lower than 20. “Pass”.

7) Price to book analysis

The company posses a PB ratio lower than 2.5 and a PB*PE ratio lower than 50. Both of these tests pass. “Pass”/”Pass”.

Conclusion

With as score of 3/8 AMD does not pass the Defensive investor Test.

Enterprising:
1) Strong financial condition

AMD possesses a current ratio higher than 1.5, so this test passes. However its debt to NCA is lower than 1.1, thus failing on the other test. “Pass”/”Fail”

2) Earnings stability

They don’t have positive net income for the past 5 years. “Fail”

3) Dividend record

No dividends are paid. “Fail”.

4) Earnings growth

Positive earnings growth over the past five years. “Pass”.

5) Price

This test fails as price is higher than 150% net tangible assets. “Fail”.

Conclusion:

As this company only passes two of the six tests, we do not believe AMD is suitable for enterprising investors.

Valuation:

We find the Fair value of AMD to be $13.80.

Opinion:

Since the company is trading at $13.50 we believe that the stock is fairly valued, but we do not find this company appropriate for neither Enterprise nor Defensive Investors.

None of the staff at ModernGraham held a position in Advanced Micro Devices, Inc. at the time of publication. Also, please read our disclaimer and Our Methods.

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