Competition Dents the Outlook of These Stocks
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Intense competition in the semiconductor industry has led investors to value stocks in this space on very low multiples. Even international growth and solid balance sheets have not helped most of these stocks to regain their worth. The following stocks show both sides of the picture:
Advanced Micro Devices (NYSE: AMD)
With the completion of the Global Foundries deconsolidation (Mar-2010) and the settlement with Intel (Nov-09) to resolve all outstanding licensing disputes, AMD completed its transformation to a fabless design company.
(Fabless manufacturing is the design and sale of hardware devices and semiconductor chips while outsourcing the fabrication or "fab" of the devices to a specialized manufacturer called a semiconductor foundry).
The cash infusion from the two transactions combined with debt repurchases have strengthened AMD’s balance sheet to a net debt position of $0.4 billion now vs. $4.0 billion in 4Q08. Despite a much improved balance sheet (i.e. significantly less solvency risk), AMD trades at 0.57x NTM (Next twelve month) sales, a 46% discount to historic average, a 71% discount to the SOX (Philadelphia Semiconductor Index) vs. historic discount of 51%, and a 68% discount to the SPX vs. historic discount of 42%.
While the valuation is attractive, the Street remains neutral on the stock given concerns around AMD’s:
(1) continued manufacturing issues at Global Foundries,
(2) weak competitive position in severs vs. Intel’s Romley,
(3) weak competitive position in ultra-mobility vis-à-vis Intel’s Atom and ARM solutions and
(4) lack of clarity around the new management’s strategy/direction.
Altera Corp. (NASDAQ: ALTR)
Altera is well-positioned in the telecom infrastructure market (makes 45% of its revenue from telecom segment) to gain from both emerging market 3G (2x the content of 2G) and the LTE/4G developed market (3x the content of 2G) build-outs. While the ramp of 40nm (nanometer) is still expected to benefit Altera (~31% of revs) in CY13, a rapid ramp of 28nm to 5-7% is expected of CY13 revenue to favor competitor Xilinx (NASDAQ: XLNX). Given this competition, investors often tend to compare Altera with Xilinx.
Given the likelihood for revenue to only modestly outpace OPex growth in CY13, Xilinx is expected to gain share in new product revenues with 28nm market share gains. It trades at a 2x premium to the historical premium vs. the SOX (33.1% vs. historical median of 16.5%) and premium to the SPX (54.2% vs. historical 51.3%). The stock seems to be more than fairly valued at these levels.
Altera’s net cash per share exiting C3Q12 was $7.78/share, or roughly 22.1% of the current market cap, below the peer median of 23.2% and below competitor Xilinx at 24.5.% of market cap. The estimated FCF yield of 5.3% for CY13 is 200bps below the peer group estimates and 150bps below Xilinx. The dividend yield of 1.1% is at par to peer group (1.1%), and less than half that of competitor Xilinx (2.4%). Despite historically higher gross/operating margins and stronger free cash flows, the Street has a more reserved neutral position on Altera given the deleveraging earnings model, and anticipated underperformance relative to Xilinx in the face of macro headwinds, which are expected to be more detrimental to Altera’s customer/geographical exposure. Shares of Altera are currently trading at 20.0x CY13 EPS of $1.76, a 28.2% premium to the historical average of 15.6x. Credit Suisse has set a price target of $32 which represents 18.2x CY13 EPS, a discount to Xilinx at 21.0x
It can be inferred from the discussion stated above that the Street is more bullish on Xilinx than on AMD and Altera due to the fact that both these companies are more exposed to intense competition than Xilinx.
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