Reuters reports that the company also forecast that its 2007 unit growth for microprocessor sales would be about twice the 10% growth AMD sees for the broader microprocessor market. The Reuters story said the company also predicted its 2007 gross margin would be 50%, “plus or minus” a few points. AMD’s long-term target is for gross margins to be in the 51% to 56% range.
Yesterday, Sumit Dhanda, an analyst with Bank of America, dropped his price target on AMD to $20 from $23, citing an erosion of average selling prices. The call was timed a day ahead of today’s AMD meeting with analysts.
So, clearly, Dhanda is not having a good day: the stock is spiking, apparently due to the aforementioned disclosure that it will have much greater than expected cost savings from its recently completed acquisition of graphics chip maker ATI Technologies.
Is Dhanda backing down? Nope. In fact, he just whipped out a note asserting that the spike in shares today is unwarranted. Dhanda contends that the rally is likely to be short-lived, since “consensus estimates for ‘07 for AMD-ATI will likely need to be reduced further, given that AMD has just reset its ‘07 [gross margins] and implied operating margins below prior forecast.” He adds that “new details on depreciation and tax rate imply even more cost headwinds” compared with prior projections.
The company today said it expects gross margin to be 50%, plus-or-minus 2%; he says the the consensus estimate assumed a gross margin higher than 50%. He also notes that the company now sees $1.3 billion in depreciation in 2006, up from about $800 million in 2006, and above his previous estimate of $1.07 billion.
Dhanda also notes that AMD had previously said that it expected a post-merger operating margin of 18%-24%; but he says that today’s announced targets for R&D (19% of revenue plus-or-minus 2 point) and SG&A (16% plus-or-minus 2%) imply operating margins of 15%.
Dhanda asserts that the higher cost synergies from the merger “has much to do with the fact that ATI’s revenues are trending meaningfully lower than at the time of the merger announcement.”
Finally, he notes that the expected tax rate of 26% is above his prior estimate of 20%. And he points out that the company guided to negative $500 million in free cash flow.
“Net net, a disappointing financial update, yet not too surprising,” he concludes. “We believe the margin reset…[is] likely to be a disappointment for investors. The fact that AMD did not trim its near-term targets means nothing to the stock, as consensus ‘07 EPS estimates will need to be reset lower.”
AMD today is up 11.9%, to $22.57.