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I have recently spent time analyzing the financial statements of two of the largest PC microprocessor manufacturers, Intel (NASDAQ:INTC) and AMD (NYSE:AMD). Specifically, I have been focusing on their profit margins and inventory levels. Taking a brief glance at the profitability of these two companies, it would appear that AMD has made a miraculous recovery from losing money year over year.

Profitability

Intel

AMD

Year

2010

2009

2008

2007

2010

2009

2008

2007

Gross Margin

65.31%

55.69%

55.46%

51.92%

45.60%

42.05%

39.94%

37.37%

Net Income Margin

26.28%

12.44%

14.08%

18.20%

7.25%

6.96%

-53.87%

-57.94%

Upon closer inspection on the income statement for AMD, you will find that AMD’s profit in 2010 is mostly due to an unusual income in the amount of $263 million. In 2009, AMD profit is entirely due to a substantial unusual income in the amount of $1.343 million. Profitability for AMD escapes year after year…

Inventory Efficiency

Intel

AMD

Year

2010

2009

2008

2007

2010

2009

2008

2007

Inventory Turnover

4.52

4.66

4.71

4.80

5.89

5.12

4.76

4.52

Inventory Days on hand

80.71

78.31

77.55

76.09

61.94

71.29

76.70

80.78

The good news for AMD is that it has managed its inventory much better than in previous years. As you can see, in 2007 AMD held inventory for almost 81 days and has managed to bring that down substantially to 62 days. This increased efficiency should have led to higher profit margins, but instead has done nothing but increase AMD’s quick ratio.

AMD

Year

2010

2009

2008

2007

Quick Ratio

1.77

1.68

0.77

1.43

My next measure for comparison is the percentage of total revenue each firm spends on R&D, illustrated in the below table.

Intel

AMD

2010

2009

2008

2007

2010

2009

2008

2007

R&D exp. as % Revenue

15.07%

16.09%

15.22%

15.01%

21.64%

31.85%

31.82%

30.23%

Even with AMD spending twice as much as Intel in all years except 2010, AMD has managed to be behind the curve on almost every microprocessor innovation. With increased competition from Intel as well as ARM Holdings (NASDAQ:ARMH) with their fusion processor, AMD’s future is looking grimmer with less profitability by the moment.

My recommendation: Long INTC, short AMD.

Source: PC Microprocessor Space: AMD's Future Looks Grim Compared to Intel