Posts Tagged ‘AMD’

AMD (Reporting Tomorrow)—It’s not Intel

July 14th, 2010

At the end of last year, to avoid having to consolidate its  83% ownership investment in Globalfoundries, which, if undertaken would have harmed its financial results and balance sheet, AMD took the unusual step of renouncing its control in that large enterprise.

Adopted by FASB in June, 2009 for adoption beginning in 2010, FAS 166, Accounting for Transfers of Financial Assets, and No. 167, Amendments to FASB Interpretation No. 46(R), changes the method by which entities account for securitizations and special-purpose entities. FASB 166 relates to the consolidation of variable interest entities, and 167 amends existing guidance for when a company “derecognizes” transfers of financial assets. A variable interest entity is a business structure that allows an investor to hold a controlling interest in the entity, without that interest translating into possessing enough voting privileges to result in a majority. The new standard requires noncontrolling interests be reported as a separate component of equity and that net income or loss attributable to the parent and noncontrolling interests be separately identified in the statement of operations.

Under this recent accounting rule dealing with variable interest entities, which took effect this year, AMD would have been required to consolidate Globalfoundries  its debt and income into AMD. By renouncing its control, AMD is merely required to state its investment as a single line entry, even though it may be partially or wholly on the hook for a share, or all,  of its debt.

These type of actions, while having little to no impact on cash flow, can nevertheless serve as signals of impending busineess conditions. For if AMD’s position was strong, we doubt such a transaction would be considered. But that’s the result of a firm with large negative free cash flow with high cost of capital-unlike Intel.

No wonder AMD’s stock has continued to fare poorly.

Intel-Reporting After the U.S. Close

July 12th, 2010

(updated July 13 6:21 a.m. est)

Intel Corporation (INTC) will release its financial results after the US financial markets close.

We spotlight INTC due to its consistent ability to produce free cash flows and strong credit, both of which manifest in a below-market cost of equity capital. INTC is, by Credit Trends, rated “A” for both cash flow and debt, as seen below.

While the model has picked up some deterioration of its credit quality over the past year (operating cash flow adjusted for working capital changes, leases, total debt, ratio of working capital to total debt, pensions, inventory/sales, reinvestment, taxes, others), INTC remains a very strong credit, and is thus accorded our highest rated class.

The table below shows INTC could free up additional free cash flows by reducing its selling, general and administrative expense more in line with its rate of growth. Interestingly, INTC has done this with its R&D even though R&D as a percentage of both sales and cost of sales has declined. This was due to the absolute expense reduction in nominal dollars during its past fiscal year of approximately $100MM. This was quite close to the $91 MM we calculated as corporate “fat” we called for a year ago.

INTC is a low tax rate payer by any measure, but in a higher rate (on a cash basis) and more importantly, a more consistent rate than AMD or TXN.  In “Security Valuation and Risk Analysis” we show how taxes should be analyzed for areas of weakness and strength, including its role as a leading indicator. In its last fiscal year, INTC was in a 16.5% cash rate versus the 23.4% rate reported to shareholders. By contrast, AMD was in a 3.4% cash rate and TXN a 16.4% rate. Over the past 6 years INTC’s cash tax rate has averaged 6 percentage points higher than TXN.

As for fair value, given its estimated 7% rise in long-term free cash flows and low cost of capital, INTC is currently about 13% undervalued.

Date Source: Research Insights, CT Capital LLC

Kenneth S. Hackel
President
CT Capital LLC

www.credittrends.com

INTC has risk and should not wish to be considered by certain investors-consult your investment professional.

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