Shares of Advanced Micro Devices (AMD) have fallen from a high of ~$49 per share in mid-2000 to a recent closing price of $2.44. In this article, I will discuss the prospects for AMD's ability to arrest the slide in its value. Specifically, we will look at the impact of the recent closing of the 7171 Southwest Parkway facility in Austin and how that will impact the cash cushion of the company.
On March 26th, AMD closed the sale and lease-back of its 7171 Southwest Parkway facility, generating proceeds of $164MM. It is anticipated that the net rent payable will be $10.3MM in 2013 and $10.8MM in 2014, per the company's 8-K (see below).
In addition, the company expects to take a charge of $50MM in the 1st quarter, principally due to the difference in sale price and book value of the 7171 facility.
The $164MM of cash from this transaction provides much needed cash for the company's targeted cash balance range of $700MM (minimum) and $1.1BB (optimal). I am expecting the ending cash balance of $1.0BB for 12/31/12 (see below) will be drawn down as follows during 2013:
The company has guided that CapEx will be $150MM in 2013, per the most recent earnings release. Essentially, the cash from 7171 will cover the company's forecast CapEx for the year which, if AMD can achieve positive operating cash flow by the second half of 2013 as it has guided, it will be within its targeted cash range of >$700MM by the second half. However, you can see without the cash from 7171, the company would likely end the second quarter just above $500MM in cash. In addition, it is also obvious that the company has little or no margin for error in delivering the second half cash flow.
I want to see AMD turn things around, but I am concerned that its weak cash position and its highly leveraged balance sheet leaves it with very little room to maneuver versus two competitors with significantly better balance sheets: Intel (INTC) and Nvidia (NVDA). Below, you can see the a comparison of the balance sheets of AMD, INTC and NVDA:
To be blunt, I expect INTC and NVDA to keep pressure on AMD in the computing and graphics segments respectively, pressuring margins and unit volumes. The wild card in this mix is the ramp up of the embedded revenue mix growth from 5% to 20% by Q4 '13.
What The Bonds Are Saying
The price movement of the senior unsecured bonds maturing in 2020 (CUSIP: 007903AU1) shows some optimism that the cash generated from 7171 and the product plan are on track, as the prices have moved up approximately 5 points since AMD announced year end results, 2013 guidance and the 7171 transaction, as seen in the graph below.
Lastly, I think that the equity prices are at a critical technical level at around $2.40. Watching the price action over the next few days will tell us a lot about whether the stock wants to follow the lead of the debt market or continue to trade lower. Right now, the equity and bonds are telling a different story.
I want to buy AMD, but I can't. I would rather miss part of the move up, should it occur, and wait for first quarter 2013 results, or for the debt and equity to start moving in concert before I take a position in this chip name. More to come.