Friday, January 12, 2007

Color on warning: AMD (NYSE:AMD)

Several firms are commenting on Advanced Micro (NYSE:AMD) after the co issued a negative pre-release last night:

- Goldman Sachs notes that while no explicit CY4Q06 sales guidance was given, management had indicated on its CY3Q06 earnings call that sales should increase in-line with normal seasonality of about +10% qoq. Operating income (excluding ATI and related charges) is now expected to be positive but down significantly qoq. Per firm's expectation, margins were negatively impacted by significantly lower CPU ASPs. They are lowering their EPS estimates on lower sales and margins: CY4Q06 EPS goes to $0.06 from $0.22; CY07 EPS goes to $0.90 from $1.05, and CY08 EPS goes to $1.30 from $1.80.

CY4Q06 marks the 3rd consecutive quarter AMD has missed expectations. GS downgraded the stock on 1/3/2007 given their view that the Street would cut estimates as it acknowledged that it is too big of a leap to get to the 2007 guidance AMD provided at its analyst meeting given the current state of its business. They view AMD as their best short idea in semis and continue to expect estimate cuts as the Street capitulates that AMD's 2007 outlook is too optimistic. Firm believes Intel stands to benefit from AMD's missteps given its current product superiority. While they do not see absolute upside in Intel's stock given that it is trading at 22X normalized EPS, they continue to expect a long Intel/short AMD pair trade to be very profitable in 2007.

Tgt goes to $16 from $19.

- JP Morgan says theybelieve the downside was driven by Intel's aggressive pricing and superior products and they expect further downside to Consensus estimates until AMD and Intel begin cutting capital expenditures. They downgraded AMD to Underweight in October due to expectation for downside to Consensus estimates and they note their previous C07 EPS estimate of $0.56 was roughly $0.55 below Consensus.

As a result, they are lowering their C06 revenue and EPS estimates from $5.7 billion and $1.12 to $5.6 billion and $0.93 and C07 revenue and EPS estimates from $7.4 billion and $0.56 to $6.7 billion and $0.18. Reits Underweight.

- UBS notes this warning reignites their doubts about AMD's flat to slightly up ASP assumption for 2007 given at the last analyst day. Furthermore, they believe AMD is also facing challenges in the ATI integration as they believe the R600 graphics product could be facing delays, leading to further share loss to NVDA.

Firm notes they have warned in the past about AMD's vulnerability in server which they estimate account for 35-40% of AMD standalone gross profit/cashflow and <10% of units. Intel's success with both Woodcrest/Clovertown seems to more than erase any progress AMD makes in notebooks.

Given Intel's 9 month lead on quad-core they expect a sharp Intel price cut ahead of AMD's quad-core (Barcelona) launch in late 2Q07 - a situation Intel can hedge with 45nm ramp & restructuring benefits. AMD's guidance of -$500m negative free cash flow in '07 looks challenging & could be worse, they had earlier warned. Maintains Neutral and $23 tgt.

- Citigroup is downgrading the shares of AMD to Hold from Buy reflecting concerns that gross margin may face more persistent pressure than anticipated. While they lowered estimates on AMD earlier this week to below-consensus levels, pricing pressure in servers leads them to reduce estimates again.

Tgt goes to $21 from $26.

Notablecalls: While many firms were negative on AMD ahead of the pre-release (GSCO with Sell, JPM with Underweight) I think ThinkEquity's Eric Ross nailed it for traders with his Jan 3 comments saying inventories at AMD has suddenly built in the channel, and prices were plummeting. Be sure to check out his intraday call on INTC from yesterday. AMD's loss may not be INTC's gain after all.

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