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Stock Analysis
Old 05-03-2020, 03:30 PM   #1
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Stock Analysis

I've been researching Peter Lynch's methods of investing. I'm currently following the guidelines he recommended in One Up on Wallstreet to analyze potential stocks. However, this book was published decades ago so his examples from Annual Reports look different from what I'm seeing today, and I need some help translating the vocabulary/formulas.

Today I was analyzing AMD (Advanced Micro Devices) (ticker:AMD) because of the release of their latest groundbreaking CPU. But, either I'm doing something seriously wrong, or this stock is a seriously bad deal. Can you double check this? As discussed in Lynch's book, I'm trying to compare the p/e ratio to the growth rate. I found the p/e ratio listed as 119.32 in some basic info online. Then in order to calculate the growth rate, I looked for their Income Statement on the annual report from SEC.gov to try to find their Annual Earnings (as Lynch refers to it). I didn't find any chart for Income Statement, or anything listed as Annual Earnings. But I did see "Net Income (loss)" listed in several charts (Consolidated Statements of Stockholder's Equity, and Consolidated Statements of Cash Flows), as a consistent number regardless of which chart I was looking at. So I used it. Then I used the following formula to calculate growth rate:
[ (Recent Year Annual Earnings - Previous Year Annual Earnings) / Previous Year Annual Earnings] x 100 = _____ %

I Using that formula, I got a growth rate of 1.18%. This is terrible, right? Compared to a p/e ratio of 119.32?
Lynch said "The p/e ratio of any company thatís fairly priced will equal itsgrowth rate (of earnings).In general, a p/e ratio thatís half the growth rate is very positive. A p/e ratio that's twice the growth rate is very negative. We use this measure all the time in analyzing stocks for the mutual funds."

But the stock's price is sky rocketing, even now after the March crash.

What am I doing wrong?

In the annual report, it lists "net income (loss)" - what does the "(loss)" indicate? Is it just reminding us that numbers in parentheses are negative?

Thanks in advance for any assistance!
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Old 05-03-2020, 03:37 PM   #2
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Quote:
Originally Posted by Ruishi View Post
But the stock's price is sky rocketing, even now after the March crash.

What am I doing wrong?
You're not doing anything wrong. On traditional valuation models, AMD is overvalued - nothing unusual. How would you value AMD if they were posting losses? They've been a habitual money loser for decades having a high debt load. Periodically they'd have growth spurts, only to see them once again lose their way. Currently things do look better for them. Folks are looking at potential future growth. The valuation today means little - no matter what the share price at the time, if good news comes out, the shares will be taken higher. That's the mentality today.

Quote:
In the annual report, it lists "net income (loss)" - what does the "(loss)" indicate? Is it just reminding us that numbers in parentheses are negative?
Yes.
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Old 05-03-2020, 04:30 PM   #3
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I don't own AMD stock but I own the 8/15/2022 7.5% notes that I bought below par. I wouldn't buy the stock but their bonds are pretty safe. The stock is moving on momentum.

Here is the latest from Moody's on AMD.

Advanced Micro Devices' solid first-quarter results and outlook are credit positive.

On 28 April, semiconductor maker Advanced Micro Devices, Inc. (Ba2 positive) reported a 40% year-over-year revenue increase to $1.79 billion for its first quarter and forecast a 21% year-over-year increase to $1.85 billion for the second quarter, a credit positive. AMD noted strength in chips for the notebook, desktop and datacenter end markets that were partially offset by negligible sales in semi-custom chips (for game consoles that are going through a generational transition) that it expects will continue in the second quarter. Following AMD’s projected 21% year-over-year revenue increase for the second quarter, we are assuming a 25% increase in the third quarter driven by ongoing strength in chips for servers, notebooks and desktops as well chips for next generation Xbox and Playstation gaming consoles. For the full year, we project AMD’s revenue will increase by about 25% to $8.4 billion, driven by the introduction of and strong market uptake of new and higher-end desktop and notebook chips, graphics chips, further market share gains for server chips, as well as strong growth in custom chips or game consoles in the second half of the year.

Despite the coronavirus-driven economic downturn, we expect AMD will grow profitability, and expand profit margins and cash flow after capital spending. In 2019 AMD achieved 43% adjusted gross margins and, in March 2020, AMD increased its long-term gross margin target to 50% from 40%-44% set in mid-2018, which itself was up from previous targets of 36%-40% (see Exhibit 2). The new, expanded long-term target is primarily driven by higher performance and higher-margin Ryzen (notebook and desktop personal computers) and EPYC (server) processor sales as well as datacenter CPU/GPU sales. With a steady cadence of new product launches with higher price points and growing volume, AMD has expanded gross margins steadily since early 2016. Reflecting strong and improving product mix and despite what we expect to be strong growth in lower-margin game console chips (new Xbox and PS5 consoles in third quarter), we project 45% gross margins in 2020.

Combined with continued good cost controls, we project AMD’s quarterly EBITDA will average $450 million during the rest of 2020 while average EBITDA margins of about 20% (see Exhibit 3) compare very favorably to 7% in 2017.

Given our outlook for strong revenue growth and margin expansion, we forecast AMD will generate over $400 million of cash flow after capital spending in fiscal 2020 (see Exhibit 4). The downside to our cash flow forecast would likely come from stronger-thanexpected growth and the need to position/build inventory to meet strong demand.

Throughout 2020, AMD will maintain an excellent liquidity profile. As of March 2020, AMD had cash and short-term investments of $1.39 billion, well in excess of total funded debt of $563 million. AMD has no debt maturities until $312 million comes due in August 2022. Given the improving cash flow generating outlook, access to a $500 million secured revolving credit facility ($200 million drawn) and our expectations that management will maintain at least $1 billion of cash and short-term investments, we view the company's liquidity profile as excellent. Under these assumptions, leverage will continue to improve, with adjusted gross debt to EBITDA around 0.5x in December 2020, down from 0.8x at December 2019. Similarly, the company's free cash flow to adjusted gross debt is projected to improve to over 50% in December 2020, up from 34% at December 2019 (see Exhibit 5). At year-end 2020, we project AMD's cash would exceed the company’s total $312 billion of funded debt by more than $1 billion
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Old 05-03-2020, 04:37 PM   #4
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I have seen that segment of high tech rotate over the years (heck, I knew executives of Floating Point Systems). Today's high flyer will have their wings clipped later. I went the ETF route.
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Old 05-03-2020, 06:19 PM   #5
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Expect a retrace to $33-$34 and then it can be bought.
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Old 05-03-2020, 09:44 PM   #6
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Thank you so much for the informative feedback - you guys are great! We've been looking at AMD since this is the first time in its history that it has produced a product that outperforms intel (who is still attempting to replicate it). But the p/e ratio and growth rate gave us serious pause. We'll keep looking!


One more thing - does anyone know how we can get Moody's Handbook of Dividend Achievers in a recent year? The closest we've found is late 90s...and Mergent's Dividend Achievers Index, but did Moody's stop? I can't seem to find where to buy either one in a recent copy.


Thanks again!
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Old 05-04-2020, 05:35 AM   #7
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I recently discovered a site that provides calculations for intrinsic value based on Ben Graham's formula which they detail here. You can then look up that value for many stocks and this is the page for AMD. AMD is currently valued at ~$8 when the price is $50.
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