Fundamentals Going Down the Drain for This Semiconductor Player

Masam is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Advanced Micro Devices (NYSE: AMD), for sure, is losing its ground. This is why it is being recommended as a short by literally every other sell-side company out there. The company is announcing its earnings today, after market close. What needs to be seen is how adversely fundamentals of the company have been affected and how its peers are performing in the market.

Fundamental Expectations

The PC market did not have its typical seasonal strength during the fourth quarter (up 1% Q/Q, down 7% Y/Y) and there are few signs of demand from Chinese New Year. The 4Q forecasts include revenue down 10% sequentially versus AMD’s guidance for a 9% decline. The quarter will be messy with $80 million of charges for restructuring and $215 million for the new wafer supply agreement. The EBITDA forecast excludes these charges. The forecasts are as follows:

– 4Q Estimates: $1,142 million sales; negative $2 million EBITDA

Credit Considerations

Based on the 4Q estimates, AMD total and net leverage will rise to 4.6x and 2.2x, up from 2.9x and 0.8x at 3Q.

The PC market accounts for approximately 85% of its sales. It is unknown how disruptive smart phones and tablets will be to the PC market. AMD has introduced new products over the past year, but so far the company has not gained traction in key areas including: smart phones, tablets or servers.

The Street believes that x86 intellectual property and the graphics business are valuable. In fact, this is what attracted Abu Dhabi to take a stake in the company, through the State-owned Mubadala Development Company.

As far as the liquidity is concerned, AMD is expected to burn over $350 million cash in 4Q and nearly $150 million in 1Q, leaving about $960 million cash at March 31 (from $1.48 billion 3Q). Moreover, AMD plans to raise $150-200 million from the sale and lease back of its 58-acre Austin, Texas campus. The company has $1.5 billion secured debt capacity which could bolster liquidity, but subordinate the senior notes. It is to be noted that AMD’s management considers $1.1 billion as the optimal cash reserve to run this company and the company is clearly falling short of it. This might call for the need to tap the capital markets.

Credit Implications

Although AMD credit trades 300bp wide to the technology index, most of the analysts give AMD an underweight (short) rating along with a Neutral rating on AMD's senior notes. To become more positive, the investors would need greater conviction in AMD’s ability to have high-impact products or expectation of a PC market recovery in 2H 2013. To become more negative, they would need to see deterioration in gross margins or believe that AMD will be left out of successful products.

Peers

Along with AMD, another designer of semiconductor instruments, Texas Instruments (NASDAQ: TXN) is expected to announce its earnings today. The consensus estimates tell us that the company is expected to post an EPS of 34 cents and quarterly revenue of $2.95 billion. If the company achieves this target, the EPS would be -29% YoY and the sales would be -14% YoY for the quarter. The decline shows the weakness in demand in the industry. TI is expected to report the quarterly revenue and profit results in line with the consensus. A decline of revenue is expected in two of its segment: Analog and Wireless. The Embedded segment is expected to produce a flat YoY result.

Without any doubt, Intel (NASDAQ: INTC) has been the leader in the semiconductor industry. It has improved its market share in PCs from 80.6% in Q32011 to 83.3% in Q32012 at the expense of AMD. Intel has been making some successful launches in the past. Its release of first ultra-low power Atom system-on-chip products for smartphones and tablets has been a huge success. The company is building on its market share through such innovations. Also, its lead is expected to widen in the near-future as new players like ARM Holdings enter the market.

Conclusion

AMD is expected to announce a decline of revenues in all of its segments: Desktops and Mobiles, Server, Chipsets and Graphics. The gross margin is expected to come down from 39% last year to 35%. March’s guidance will be of immense importance to AMD’s investors. 


AnalystX has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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