As the economy picks up, the corresponding rise in consumer expenditures will buoy up the technology sector. Key beneficiaries of this positive trend include semiconductor producers, which directly supply technology end markets. In this article, I will run you through my DCF Model on Advanced Micro Devices (AMD) and then triangulate the result with a review of the fundamentals against Broadcom (BRCM) and Intel (INTC). I find strong upside for the industry at large, especially ones targeting emerging markets.
First, let's begin with an assumption about the top-line. AMD finished FY2011 with $6.6B in revenue, which represented a 1.1% gain off of the preceding year: acceleration. I model growth trending around 10.49% over the next half decade or so.
Moving onto the cost-side of the equation, there are several items to consider: operating expenses, capital expenditures, and taxes. I model cost of goods sold as 55% of revenue versus 15.5% for SG&A, 22.5% for R&D, and 3% - 2.5% for capex. Taxes are estimated at around 15% of adjusted EBIT (ie. excluding non-cash depreciation charges to keep this a pure operating model.)
We then need to subtract out net increases in working capital. I expect this figure to hover around 0.1% of revenue over the explicitly projected time period.
Taking a perpetual growth rate of 2.5% and discounting backwards by a WACC of 9% yields a fair value figure of $7.82 for 5.9% immediate upside. By my estimates, free cash flow will near $300M in 2013.
All of this falls within the context of strong momentum:
Q1 was a solid quarter for AMD. We made good progress improving our execution, becoming more consistent and building trust with our customers and partners. We have taken steps to position the company to seize the opportunities in front of us, both in the high-growth markets and in the product categories, where our innovative technology provides us with leadership opportunities.
Our improved execution resulted in better-than-expected revenue of $1.59 billion for the seasonally down first quarter, a 6% sequential decrease and a 2% decrease year-over-year.
From a multiples perspective, AMD is attractive. It trades at 8.5x forward earnings. Intel trades at a respective 11.8x and 10.4x past and forward earnings versus corresponding figures of 22.1x and 11.5x for Broadcom.
Consensus estimates for Intel's EPS forecast that it will grow by 4.2% to $2.49 in 2012 and then by 7.6% and 8.6% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $2.60, the stock would hit $33.80 for 21.3% upside. The company has a top brand name in the industry and thus also has relatively limited downside. The dividend yield of 3% further improve risk/reward.
Consensus estimates for Broadcom's EPS forecast that it will grow by 0.3% to $2.90 in 2012 and then by 10.7% and 8.4% in the following two years. Assuming a multiple of 13x and a conservative 2013 EPS of $3.18, the stock would hit $41.34 for 13.2% upside. Management currently offers a 1.1% dividend yield.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
