Financial Analysis on Advanced Micro Devices - Example

Due Table of Contents 0 CHAPTER 2 1 THE COMPANY, THE INDUSTRY AND THE COMPETITORS IN THE INDUSTRY 2 2.0 CHAPTER 2: 4 2.1FINANCIAL PERFORMANCE ANALYSIS OF THE FIRM 4 2.1.1 Financial Ratios 4 3.0 CHAPTER 3: 5 3.1 COST OF CAPITAL, CAPITAL STRUCTURE ANAYLSIS AND DISTRIBUTIONS 5 The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment. The costs obtained by AMD amounts to around 3054m$ which is quite a significant value while the company value standing at 3914M$ is quite a value as well as of 2014. This is a good indication that the company’s value exceed its capitalization base. This is healthy for the company. The company is valued at 3480M$ in 2015. 6 4.0 CHAPTER 4: 7 4.1 Financial Statement Forecasts up to year 2020 (6 year forecast) 7 5.0 CHAPTER 5: 8 5.1 Cash Flow Valuation computation 8 5.1.1 Annual Income Statement (values in 000s) 8 6.1 Relative (Multiples) Valuation Analysis 9 7.0 CHAPTER 7: 10 7.1 Summary and Conclusion 10 1.0 CHAPTER 1 1. 1 THE COMPANY, THE INDUSTRY AND THE COMPETITORS IN THE INDUSTRY Advanced Micro Devices (AMD) made some great strides in its battle against Intel but has it yet to capitalize on those gains. AMD ranks second in PC and server microprocessors, following its archrival. Even though Intel rules the world processor market, AMD has sometimes fell down that market share, attributing this to the growing popularity of its strong Athlon and Opteron processor families not forgetting its Fusion and Radeon chips (Rodengen,19). Furthermore, adding to its portfolio of computing services and solutions, AMD generates about a quarter of most of its sales mainly from embedded processors and other chips for made for graphics, video, and multimedia applications. As for AMD, it gets most of its sales from international customers mainly those from China account for about nearly half its customers. A semiconductor is a solid material that provides electrical conductivity mainly sandwiched between a conductor and an insulator. The semiconductor industry is characterized by firms dealing with the designing and fabricating of semiconductor devices. Semiconductors are the powering devices behind the manufacturing of cellular phones, computer hardwares and other electronic components. The semiconductor industry lives and dies by a very simple analogy- smaller, faster and cheaper. The importance of being tiny is very simple: it means that more transistors can be packaged onto the same chip. The logic is that the more the transistors on a chip, the faster it can perform. Credit goes in a large part to a fierce competition and to the new technologies that significantly lower the cost of production per chip, in a manner that in a matter of months, the price of a newly manufactured chip can fall 50%. This as a result causes a constant pressure on chip manufacturers to come up with something effective, better and even less expensive than what meant state-of-the-art only a matter of months ago. Chips manufactures have continually go back to the drawing board and come up with better and superior products. This means that even in a down market, any weak sales are interpreted as not an excuse delaying in coming up with better products to entice the appetites of customers who will in the end need to do an upgrade on their computing and electronic devices. The semiconductor industry’s top companies are Intel, AMD, and Motorola. Intel competes with many other companies who make and sell the same type of product/services and has successfully clinched the position of top in the industry. Similar to Intel, AMD designs and manufactures microprocessors, system-on-chip solutions for the computer, flash memory devices, communications and consumer electronics.1Their products are not as large as compared to Intel’s, but they have been ambitious enough to manage to compete against Intel. In about a month or so, AMD has managed to take the lead in the semiconductor industry, but then fell back to its earlier industry position which was basically second to Intel. The semiconductor industry is marked by steamy rivalries between independent companies. The pressure on chip manufacturers to come up with better, faster and cheaper chips than what defined the state-of-the-art a while back. The same pressure goes as far as chip makers, design labs, foundries and even distributors it touches on everyone concerned to the business of transforming chips from R&D into high-tech equipment (Musgrave, 25). The end result is an industry that constantly comes up with cutting-edge technology while hardly surviving volatile business conditions. 2.0 CHAPTER 2: 2.1FINANCIAL PERFORMANCE ANALYSIS OF THE FIRM 2.1.1 Financial Ratios 2.1.2 Annual Income Statement (values in 000s) Period Ending: 12/28/2013 12/29/2012 12/31/2011 12/25/2010 Liquidity Ratios Current Ratio 178% 162% 182% 215% Quick Ratio 124% 122% 155% 177% Cash Ratio 68% 72% 99% 107% Profitability Ratios Gross Margin 37% 23% 45% 46% Operating Margin 2% 19% 6% 13% Pre-Tax Margin 1% 22% 0% 15% Profit Margin 2% 22% 7% 7% Pre-Tax ROE 14% 226% 0% 96% After Tax ROE 15% 220% 31% 46% 3.0 CHAPTER 3: 3.1 COST OF CAPITAL, CAPITAL STRUCTURE ANAYLSIS AND DISTRIBUTIONS Size 2014e 2015e Capitalization 3 054 M$ - Company Value 3 914 M$ 3 480 M$ The first paragraph indicates the comparative differences that is seen across the three main competitors in the semiconductor industry. AMD has seen a lot of improvements over the years catching up with its main competitors. The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment. The costs obtained by AMD amounts to around 3054m$ which is quite a significant value while the company value standing at 3914M$ is quite a value as well as of 2014. This is a good indication that the company’s value exceed its capitalization base. This is healthy for the company. The company is valued at 3480M$ in 2015. 4.0 CHAPTER 4: 4.1 Financial Statement Forecasts up to year 2020 (6 year forecast) 2014 2015 2016 2017 2018 2019 2020 The forecast indicates that sales will continue to rise over time and a slight slump between the years 2016 and 2017.The years 2014 and 2015 will register increased sales while the years 2018, 2019 and 2020 will see a stagnation in sales. Net income will rise sharply from the previous years to 2014, there will be a stagnation as from 2014 and 2015, a slight decrease from 2015 to 2017 and a rise in net income in a constant rate as from 2012 to 2020. Net profit and the operating profit enjoy a similar trend in the forecasted years. 5.0 CHAPTER 5: 5.1 Cash Flow Valuation computation 5.1.1 Annual Income Statement (values in 000s) Period Ending: 12/28/2013 12/29/2012 12/31/2011 12/25/2010 Net Income ($83,000) ($1,183,000) $491,000 $471,000 Cash Flows-Operating Activities Depreciation $236,000 $260,000 $317,000 $383,000 Net Income Adjustments $147,000 $365,000 ($174,000) $229,000 Changes in Operating Activities Accounts Receivable ($200,000) $290,000 ($347,000) ($1,138,000) Changes in Inventories ($322,000) ($83,000) $157,000 ($144,000) Other Operating Activities ($103,000) ($32,000) $114,000 ($86,000) Liabilities $177,000 $45,000 ($176,000) ($127,000) Net Cash Flow-Operating ($148,000) ($338,000) $382,000 ($412,000) Cash Flows-Investing Activities Capital Expenditures ($84,000) ($133,000) ($250,000) ($148,000) Investments $301,000 $404,000 $140,000 ($91,000) Other Investing Activities $238,000 ($290,000) ($3,000) ($884,000) Net Cash Flows-Investing $455,000 ($19,000) ($113,000) ($1,123,000) Cash Flows-Financing Activities Sale and Purchase of Stock $3,000 $14,000 $18,000 $15,000 Net Borrowings $0 $2,000 ($39,000) $446,000 Other Financing Activities $10,000 $21,000 $15,000 $23,000 Net Cash Flows-Financing $13,000 $37,000 ($6,000) $484,000 Effect of Exchange Rate $0 $0 $0 $0 Net Cash Flow $320,000 ($320,000) $263,000 ($1,051,000) A discounted cash flow analysis provides insight into the value of a company as a function of its expected future cash flows and its resulting terminal value. AMD cash flow projections for calendar years 2010 through to 2013 and using that to estimate a range of terminal values calculated in 2013 on ebitda exit multiples of 3.5x to 4.5x referred to 2014 ebitda. Calculations based on these projections and assumptions, the discounted cash flow analysis of the AMD Company results in an implied total valuation range of approximately $1.2 billion to $3.4 billion. 6.0 CHAPTER 6: 6.1 Relative (Multiples) Valuation Analysis Stock Quote AMD (NYSE: AMD) Price 4.01 Change + 0.01 Volume 23,426,954 % Change 0.25% Intraday High 4.11 52 Week High 4.65 Intraday Low 3.92 52 Week Low 2.26 Todays Open 4.03 Currency US Dollar Previous Close 4.00 Exchange NYSE 07/04/14 4:00 p.m. ET Pricing delayed 20 minutes Valuation 2014e 2015e PER (Price / EPS) 32,1x 23,5x Capitalization / Revenue 0,53x 0,52x EV / Revenue 0,68x 0,59x EV / EBITDA 8,11x 7,41x Yield (DPS / Price) - - The x in the valuation table indicates the variable representing the units sold and the resulting revenue or price equivalent. The figures will vary according to the sales registered. 7.0 CHAPTER 7: 7.1 Summary and Conclusion In conclusion, AMD is an emerging company in the semiconductor industry and the prospects for growth and profitability of the company is high. It has managed to sustain its competitiveness in the industry by tweaking and redesigning its products to meet the ever-changing need of the semi-conductor industry. Advanced Micro Devices has gained substantially during 2013: Shares are up a massive 66% and among the best performing stocks of the year. As of 2014, the revenue growth will mainly come from Graphics and Visual Solutions. There is improved financial performance for 2013-2014. Analysis puts share value at $4.50-$5.00 per share. AMD registered solid fourth quarter results, which were a bit better than previous forecast. In prediction, the AMD management expects revenue to increase in 2014, relative to the year-ago period. That change in growth will probably have had to come from the Graphics and Visual Solutions portfolio segment since the computing solutions segment will most likely be seriously affected by the volatile PC market. The forecast given for revenues arising from computing solutions is expected to decrease by 5% in 2014; the double-digit growth registered from GVS will ease the negative impact resulting from CS. As a result, revenue will mostly be seen as being up in the low single digits. By forecasting the EPS for the year 2014 of $0.03. This would be a great improvement from 2013 by a huge margin. According to (Callon, 19), looking to the future hopefully, AMD should continue to experience incremental improvement, simply because AMD is merely an equivalent of a $6B to $10B company that is currently trading at $2.9B. While the path to $6B demands revenue growth and also by leveraging the capital structure. Work Cited Callon, Jack D. Competitive Advantage Through Information Technology. New York: McGraw-Hill, 1996. Print. The Semiconductor Industry. Manila: IBON Databank Phils, 1990. Print. Rodengen, Jeffrey L. The Spirit of Amd: Advanced Micro Devices. Ft. Lauderdale, FL: Write Stuff Enterprises, 1997. Print. Advanced Micro Devices. Sunnyville, Calif: AMD, 1993. Print. Musgrave, Stephen D. Competitive Strategy in the Semiconductor Industry: Charactericstics of a One Micron Technology Industry and a Competitor Analysis of Texas Instruments Incorporated. , 1984. Print. Read More