AMD Earnings Squeezed By ATI Acquisition?

Advanced Micro Devices (AMD) bottom-line is going to be squeezed by dilution from its acquisition of ATI Technologies, J.P. Morgan’s Christopher Danely explained in a research note Wednesday.

Danely on Tuesday raised his revenue estimate for this year to reflect the ATI acquisition to $5.7 billion from $5.3 billion;but he trimmed his profit forecast to $1.18 to $1.12. More ominously, while he raised his 2007 revenue forecast to $7.4 billion from $5.4 billion, he cut his profit forecast for next year in half, to 25 cents a share form 50 cents.

Meanwhile, Danely says that the company should have about $700 million in “available cash” following completion of the deal - but he says the company will need $1.1 billion in cash next year due to declining profitability and capital expansion requirements., “As a result,” he says, “we believe the acquisition increases the risk AMD will have to slow its capacity ramp or return to the capital markets.”

Danely says he expects the company to continued to lose share in the graphics market to Nvidia (NVDA), as it did in the third quarter. Danely reports that “ATI received significant order cancellations for its chipsets used in Intel processors during the September quarter due to the acquisition by AMD.” He notes that Intel chipsets accounted for over 50% of ATI’s chipset business in recent quarters. He expects ATI’s overall graphics business to drop to $2.03 billion next year, from an estimated $2.44 billion this year.

Danely maintains an Underweight rating on the stock.