Lets just have a little valuation lesson for AMD in today’s market
By Daniel at 26 December, 2008, 3:47 pm
1. You talk about enterprise value- which is market cap + preferred shares + debt - cash (http://beginnersinvest.about.com/od/financialratio/a/aa052405.htm)= in essence the take over value of the company
2. You talk about market cap which is : # of shares outstanding x share price
3. so they differ in calculation by preferred shares + debt - cash
4. AMD has no preferred shares (http://www.amd.com/us-en/Corporate/InvestorRelations/0,,51_306_844,00.html). They redeemed all these in 1994
5. So if the enterprise value > market cap it can only mean that the cash is not enough to cover the extra debt that the company has
6. If we look at AMD’s balance sheet i will use last quarter for 2008 as the metrics are pretty close every quarter (except its cash position is dwindling)= we see debt/ equity ratio of =5,234/1,339=3.90 to be conservative i have used long term debt excluding minority interest. That is relatively high indicated that their financing earnings through growth of debt.
7. The problem with the high debt/equity ratio is in essence financing especially if the economy experience no real growth
8. I don’t believe AMD will go out business they produce a cheap and fast chip. I do believe they maybe bought out, but lets not skip over the other risks which you have failed to illuminate. I have problem with your reasoning of the enterprise value needing to be greater than the market cap which is poor reasoning in nature.
9. Additionally just because stocks were higher in the past that doesn’t mean they will reach that level once again
10. Looking for low book value : Total Assets- Intangible Assets and Liabilities. This measure i do approve of because it reduces immaterial earnings power of companies for the most part. But you have to combine this measure with better things than enterprise in my opinion
When you see a beaten down stock and someone comes along and says “X company isn’t going anywhere” the reasoning better be a lot better than “because they’re company X”. This is the essence of Dvorak’s argument.
If you’re burning through cash, saddled with debt, operate in a highly competitive and commodity-like market and have an acceleratingly small market share, I think it’s safe to say your share price is a prime candidate for a trip to bagel land.
I still remember Dvorak bagging on how hopelessly doomed and stupid AAPL was when their share price was $20 (pre split). Trough to peak AAPL is a “20-bagger”, but John missed the call on them by a country mile.
AMD had to deal with incompetent managers, but never had AMD had to deal with a credit crunch.
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