Wednesday, April 04, 2007

Calls of Note Part 2

- Merrill Lynch comments on AMD (NYSE:AMD) after they a chance to sit down with co's top management recently to see just how deep the hole is. The market may still not appreciate just how much money AMD is likely to lose in Q1 and Q2 as it struggles to work off 90nm product inventory. They are revising their earnings estimate for 2007 down again, to a GAAP loss of $1.29, and they expect AMD to burn through about $900 million in cash by the end of June. The firm is Neutral - AMD's near-term problems are too great to support a more positive stance even at the stock's current level.

The good news is that the firm thinks the market may be underestimating the competitive impact that AMD could have this year with 65nm. The quad-core server debate is beside the point. What AMD really needs is a competitive product in the performance desktop segment. MLCO thinks that Athlon 64x2 on the new process technology should meet the need, and they also think that AMD could be able to turn free cash flow positive by Q4 of this year. They are more skeptical on AMD's prospects in mobile processors this year.

The bad news is that detailed analysis of AMD's cash situation indicates that the company likely can't get to the end of the September quarter without an equity financing in the $1 billion range. Investors need to remember that AMD's ability to offer additional debt may be constrained by the need to pay back the company's existing bridge loan.

As a stock, AMD is working through a bottoming process, and although the firm thinks it's too early to buy yet they think that AMD has more competitive potential than the street realizes. Joe Osha, the analyst covering AMD for MLCO notes they were struck by one observation that Ruiz made regarding margins. He thinks that both processor companies could end up with normalized gross margins in the 50% range. They agree, and think the trick is going to be figuring out how to make money on that level of margin as opposed to trying to return the market to its pre-2005, much higher margin structure. At least AMD understands what's happening and is making the right adjustments. If the company can get new products into the market successfully this year the stock could work later on. For now investors need to remain cautious in light of the very bad outlook we're likely to see for Q2, and the liquidity crisis that AMD has to confront after that.

Notablecalls: AMD @ $10? Sure feels like it. And you just gotta buy all the Semi Equipment makers as demand from Semi side is surely getting better as we speak, right? Overall, a very nice piece of analysis by MLCO's Joe Osha. Hits the nail on the head.

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