Intel Corp (INTC)

[dhellman]

Barron's full-text of Abelson INTC/AMD comments
http://online.wsj.com/barrons/article/0,4298,SB1034981498602005828,00.html?mod=this%5Fweeks%5Fbarron...
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Intel reported earnings, strictly on the skinny side, and, for one day at least, those pitiable profits knocked the wind shear out of the rally. Investors drew the glum but not erroneous conclusion from Intel's dismal report and downbeat forecast that high-tech was still in horrible shape. Analysts and amateur kibitzers were quick to diagnose the particular ills that Intel was prey to. Oddly, not many of them cited a problem that could cause it more than a small headache next year and beyond.

The problem is called Advanced Micro Devices, or more commonly among high-tech aficionados, AMD. We'll explain in a moment how AMD, which has roughly 20% of the processor market versus something close to 80% for Intel, spent $651 million on R&D last year versus Intel's $3.8 billion, had capital investment of $679 million versus Intel's $7.3 billion and had sales that were only a seventh of Intel's -- how this distant No 2, in short, can cause Intel big trouble.

The answer simply is in an AMD product called by the working moniker of Sledge Hammer (it'll be marketed as Opteron), to be introduced in the first half of next year, that gives AMD for the first time a shot at the lucrative server and workstation market, long dominated by Intel. More to the point, the Opteron is getting rave reviews in the trade, while Intel's competitive product, Itanium, already on the market, is proving a huge disappointment.

If this sounds familiar, it's probably because you read it in Rhonda Brammer's feature on AMD in August. The stock, then 7-plus, has been roughed up: It got as low as 3 and change before bouncing back last week to around 4.40. If she liked the shares at 7, she's got to love them at four, we reasoned, and urged her to revisit AMD. And, gracious as ever, she did.

Two things killed the stock in the month or two that followed her piece, she reports. The first was in mid-September, when the company announced that introduction of its Hammer chip for desktops (not the Sledge Hammer) would be delayed by a quarter, until late March-early April. Then, on Oct. 2, it forecast that sales in the third quarter would be some $500 million, instead of $600 million, and it would show a "substantial operating loss."

This revised melancholy forecast, Rhonda notes wryly, was on the money: On sales of $508 million, AMD lost $254 million. And worse, it burned cash at the rate of $300 million, compared with $200 million in the second quarter. That was enough to raise fears that the company might go belly-up.

But beneath the sorry surface, Rhonda found the third quarter actually wasn't all bad. For AMD refused to flinch and, instead, bit the bullet: It cleaned up its inventory channels, not only by holding off shipping new products but also by swapping new processors for old ones and eating the difference in cost.

Ex this cleaning out of inventory, she reckons, sales would have topped the expected $600 million and the loss would have been significantly less. But thanks to the purge (and continued brisk demand for flash memory used in cell phones), management is confident that revenues in the fourth quarter will rise a hefty 20% from the third and the red-ink will be noticeably narrower.

Moreover, vigorous cost cutting (not laid out in much detail) will, officials insist, progressively and sharply pare the loss in the next two quarters. Indeed, management says it'll break even in the second quarter of next year. Meanwhile, Rhonda observes, the company has beefed up its balance sheet by mortgaging a facility in Austin to the tune of $155 million. At the end of the quarter, it had $891 million, or $2.60 a share, in cash, enough, CFO Bob Rivet contends, to enable it to negotiate tech's tough times. Book value is $9.45 a share, or over twice the share price.

And, in any case, Rivet assures, "We could borrow another $300-500 million in high-yield debt." Little wonder, Rhonda chuckles, he bristles at the talk of AMD going under. In an unguarded moment, Rhonda says, Rivet allows as his stock is "an unbelievable bargain -- a screaming deal. Value players should be gobbling it up." She feels he's right, provided -- and it's no small proviso -- things go on schedule.

On that score, Rhonda relates, CEO Hector de J. Ruiz is supremely confident. He declares the schedule for Opteron (nee Sledge Hammer), aimed at the rich server and workstation market now dominated by Intel, has not slipped and will be shipped in the first half of '03. "It's out there," he says. "It's tested, it's real, customers love it. Nothing out there competes."

And, adds Rhonda, it is aimed at the business market, where demand for 64-bit technology is already keen and where customers willingly pay up for a state-of-the-art chip.

AMD, Rhonda sums up, remains an intriguing spec. An investor can lose virtually all his chips if things go wrong. But if things go right, the stock shapes up as a no-sweat triple or quadruple.

dh