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A Tipsy Tech Titan

01/02/2013 11:00 am EST


Marilyn Cohen

President & CEO, Envision Capital Management, Inc.

In the tech world one day you are the windshield and the next day you're the bug and this chip company is a prime example of that observes Marilyn Cohen of Bond Smart Investor.

We recommended Advanced Micro Devices (AMD) in January 2011. We see this position as a problem for two reasons:

  • There is overall weakness in the PC industry-cyclical as well as secular. The PC industry is AMD's principal market.
  • Within this declining market, AMD's share continues to fall

So we're faced with two unfortunate circumstances that combine to create problems for AMD. However, management is not just sitting on their collective thumbs, waiting for the other shoe to drop. They're doing are a number of things to counter these negative market influences.

First is where AMD chooses to compete. Their goal is to derive a larger portion of their revenue from non-PC markets going forward. They are specifically targeting the smartphone and tablet markets. Management's target is to get 20% of total revenue from these markets.

Management's next strategy should endear them to any bondholder. They intend to conserve as much cash as possible. AMD is well on its way to accomplishing this goal by working with its principal chip manufacturer, Global Foundries.

The purchase agreement, delivery, and payment schedules have been greatly modified to AMD's benefit. Rather than pay GF $500 million this month, they have agreed to reduce the amount owed by $65 million and spread the payments throughout the next 12 months. Certainly, this schedule matches the cash outflow with what AMD expects to take in as revenue.

Additionally, AMD has reduced its 2013 wafer purchases from GF by $350 million. This brings 2013 scheduled wafer purchases of $1.15 billion much closer to the $1.2 billion they actually bought in 2012. This schedule reduces the amount of raw material inventory AMD will carry next year without converting it to salable finished goods.

Management plans to have the company generating free cash flow during the second half of 2013. AMD also plans to end 2012 with $1.1 billion in cash. It intends to maintain a minimum cash level of $700 million throughout 2013.

One way management can ensure this happens is via a sale/lease back arrangement for their Austin, Texas campus. Additionally, the company could raise debt secured by intellectual property portfolio if necessary. Management says both are on the table if necessary.

We remain cautiously optimistic about AMD. They are in a weakened industry and are losing market share. Still, the measures that management is taking should preserve liquidity through 2013.

For now, we'll nurse this one along, while keeping a close watch on how it actually performs. At the first sign of deviation, we'll issue an Action Alert and probably a sell recommendation.

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