A Horrible but Cheap Company Offering Upside

December 10, 2012 | Comments (8)

Guest post by

Frank Tudor

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Last week I was wading through my programming stuff when I got an instant message from my boss. He asked, “When would be a good time to sell AMD”?

AMD?

Now a lot of thoughts are raised with a question like that. Like, where did you come up with AMD and what were you smoking or drinking when you hit the bid?

But what did I do?  I bought shares.

First let me back up a  little.

Brief Technical Discussion

Although I value stocks in a fundamental way, I also employ some technical analysis into my research. I grabbed a one year daily chart where I had the standard 20, 50 and 200 exponential moving averages plotted, volume, fast Stochastic, William R%, MACD, and a few others.

What I saw astounded me.  I went back and checked the stock as far back as Google finance would let me.  In recent years the last time the stock got this low and recovered was in 2008. Additionally, the last time AMD was over its 200 moving average was in 2003.  It crossed back under over 6 years ago, and the stock has been under constant pressure for over 6 years.

I remember a technical condition, that was taught to me years ago.  All gaps must fill.  Gap downs included.  Where is the first gap?  $2.56 and the second is the $3 area.

Back to Fundamental Analysis

Fast forward to now.

What we have is a globalized and somewhat exhausted growth stock. It is highly distressed and AMD’s valuation is all over the board. In other words, it is a hot mess. Let’s look at the details.

Starting with the Piotroski score as a score to determine the quality of a business by looking at the accounting, the TTM score is a 3.

This puts AMD at the bottom of the pile in terms of quality.

Last year it was a 5, before that 6, and before that 7. So the quality has been going downhill.

If you take a look at the above numbers, you see that outside of the Beneish M score, which is a reflection of earnings manipulation, AMD is not in a good state.

Here are some valuation numbers I came up with using the OSV intrinsic value spreadsheets.

Valuation as a whole is horrible, particularly due to the competition and headwinds AMD faces.

Current ratio is 1.8. Over 2 would be better, but the worst offender is long term debt. It is now over $2.01 billion, giving it a Long term debt to equity ratio of 2.1.

From these numbers alone, you gea sense that AMD difficult to value and assess. So why am I interested in investing in something that is so broken.

So Why AMD Despite the Horrible Valuation?

There are a few reasons:

1. Desktop and Laptop CPUs and GPUs are still moving regardless of what Apple is doing (regardless of what people think).

2. Global founderies has a strong relationship with AMD, and through Abu Dhabi, a company called Mubadala has a direct interest in AMD.  Mubadala invested in AMD to keep it liquid in the event something went awry. It now has a 19% stake in the company and more so in joint technology development and research. I believe they have billions more if they need to do an emergency intervention.

3. AMD announced its foray into ARM development.  A bold step that adds to CPU, GPU, logic circuits, memory circuits, flash technologies, and mobile chips of various kinds.

 4. AMD is a globalized company.  Around the world there is a lot of interest by public and private entities to make sure AMD survives and functions as a company for the future in order to make sure that the Intel domination is curtailed. We also know that since the dawn of the personal computer, Intel has always had their products priced at a premium. At the same time you could find AMD products of equal quality or better for a lower price. It was true then, it is true now.

 5. Computer Architect Jim Keller joins AMD as the Chief of Processor Group. He was Apple’s A4 and A5 chip designer.  Those chips are in the iPhone and iPad.  Leaders at Intel probably had a collective series of strokes when they discovered this.  Keller is one of the best SOC designers and with his ARM design experience, this should change the future core technologies of AMD.

 6. The Austin office had a for sale sign hammered into the grass out in front of the building. A campus sale will generate cash that they need.

 Many people are already likening AMD to Nokia and its recent pull out of hell. Nokia also went under $2 per share, now 6 months later it is at $3.44 a share.  Not bad.

This is one instance (stock wise) where I followed my boss into an AMD investment.

What is the Narrative Here?

  • Stocks are weird
  • Sometimes you get investment ideas under unusual circumstances.
  • Sometimes it is good to combat your cognitive dissonance when it comes to valuation.
  • Sometimes stocks that do not value perfectly can surprise you.
  • Technical assessments are not arcane and lend to the narrative “the past is always a good predictor of the future”.

Disclosure

The author is long AMD

http://franktudor.wordpress.com

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  • Anon

    I don’t understand.

    Your purchase lacks margin of safety, and looking at points #1 to #6, seems purely speculative. I can’t imagine any long term success with such shallow analysis.

  • Frank

    It is absolutely important to discuss stocks like this for so many reasons. AMD is fascinating to me. For one, it is a zombie globalized corporation with it’s best years (seemingly) behind them…that is trading on the NYSE and has been for almost 30 years (as a rule I stick to NASDAQ GS and NYSE stocks).

    AMD is a company that is still, in so many ways, still relevant as well as important as a technology company (regardless of financial malaise or what investors think).

    AMD is horrible when it comes to margin of safety. I think it came up 0 or negative (if that is possible) . But worse things have happened to better companies (and their shareholders). So here is the simple way I made my decision.

    AMD is trading at $2.32
    DCF put the price at $3.60
    EPV is in the $6 range
    Reproduced value is $9.

    The company has hit $40 a share twice historically (and in some ways history is a good predictor of the future). So I own it and I feel very comfortable about it from a PPS perspective.

    I should have stated point 6 like this: “The building is for sale which will generated cash to help them along”. Nokia did the same thing. I am not directly comparing them but it seemed to have helped Nokia’s position along with their new Chinese involvements.

    As an aside, there are other companies that I am or have been involved with recently. RSH, NOK, AMD, UEPS, PWER, LEE, just to name a few. I am not going to make any money trading higher priced stocks. I can’t compete with high frequency trading action, EFTs, leveraged ETFs and so on. So it is better for me to stick to dying and low priced companies and hope for the best.

    I will admit AMD has volume that makes me highly uncomfortable. My next stop targets on AMD are $2.51 and then somewhere in the $3 range. If I can get to over $3, I will be happy. I am not holding my breath.

    Thank you for the comments.

  • Frank

    Sorry…Mistake. AMD has traded for almost 35 years not 30. I was looking at a truncated chart.

  • Anon

    Thanks for reply.

    Regarding “DCF put the price at $3.60″ – I got confused when I saw “Discounted cash flow: $1.69/share” in the article.

  • Frank

    It looks like we have a few number problems on the valuations in the article. Embarrassing. Thanks for catching that. I will see if Jae can make changes post-mortem.

    Here are the proper current valuation numbers for AMD:
    $2.32 Current Price
    $(1.13) NCAV
    $9.67 Total Net Reproduced
    $6.24 EPV
    $3.60 DCF
    $(2.47) for Ben Graham (using a 4% bond rate).

  • http://www.oldschoolvalue.com/ Old School Value

    sorry edit has been made. I was running some other numbers when I posted this.

  • Frank

    Thank you Jae…

  • Pingback: $CSCO, $AMD …twisted pair cabling of win | Frank Tudor on stocks...

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