Wednesday, March 21, 2007

Calls of Note Part 3

- TWP is reducing their estimates on AMD (NYSE:AMD) following a round of checks indicating upcoming price cuts and continued channel headwinds. Furthermore, with negative free cash flow expected through most of 2007, they expect management to turn to the capital markets to raise cash over the next several months. However, the firm maintain Market Weight rating and are waiting for more concrete performance benchmarks of Barcelona, although they are incrementally more negative on shares given pricing, channel and financial challenges.

AMD exited 2006 with $1.54bn in cash, $3.8bn in debt and is planning $2.5bn in capital expenditures in 2007. As a result, the firm now is modeling negative free cash flow throughout 2007, with a need to raise cash by 4Q, unless capital expenditure (capex) is reduced. Checks indicate that management may be planning for a $1bn convertible during 2Q. TWP believes ongoing concerns regarding potential financing is likely to continue to weigh on shares, although they believe that management may have other options (including the possibility of lowering its capex requirements).

Given the recent decline in stock price of approximately 39% over the last three months (versus a 0.88% decline in the S&P 500), the firm believes that much of widely known issues are already baked into the current valuation. Given management's recent commentary and checks that indicate additional upcoming headwinds, however, they are cautious on the name and will monitor 1) the timing and performance benchmarks of Barcelona, 2) the health of the channel and 3) the overall pricing environment for potential upside. As such, they believe shares are fairly valued, trading at 1.1x P/book versus historical average of 2.0x, 4.8x P/EBITDA versus historical average of 10.0x, and 1.0x P/sales versus historical average of 1.0x.

Notablecalls: Not actionable but good to know category.

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