AMD: Jefferies Ups to Buy on Balance Sheet, Yield Improvements

Shares of chip maker Advanced Micro Devices (AMD) are higher by 46 cents, or 6%, at $8.22 after Jefferies & Co.’s Mark Lipacis this morning raised his rating on the shares to Buy from Hold, and raised his price target to $10.50 from $7, writing that the stock is not reflecting an improved balance sheet, nor improved standing in mobile computing graphics chip sales, nor its prospect in server microprocessors.

Lipacis recounts the various “rock and hard place” scenarios of AMD over the decades, where it constantly found itself struggling to fund competitive microprocessor families given Intel’s (INTC) dominant position.

He acknowledges that ARM Holdings (ARMH) is now seen as the real challenger, not AMD:

We�ve heard some wonder aloud if ARM ultimately replaces AMD as a stalking horse on Intel MPU pricing, if not as a second MPU source.

But then Lipacis cites the many things that are going in AMD’s favor or could go in the company’s favor.

The sale of the GlobalFoundries manufacturing arm has improved AMD’s balance sheet, making its financing crunch less threatening:

Today, its net debt position is under $500 million, and its interest coverage ratio is approaching 5.0 (charts 3 and 4). Having shed its manufacturing unit, AMD no longer needs to make multi-billion dollar capital investments every couple of years just to stay in the game.

The company has gained 4 percentage points of share in mobile microprocessors in the last year with its “Llano” family of notebook processors versus Intel’s “Core i3” chips, notes Lipacis, likely because notebook computers require more and more graphics performance. “By integrating its graphics into the same chip as its CPU, AMD is uniquely able to offer a superior graphics experience,” he writes. Intel “compares favorably” to Intel in terms of performance per dollar, he writes, after reviewing benchmarks, including on pure CPU (integer) performance.

AMD may also benefit from its next version of its notebook processor, the low-power “Trinity” application processor, which may do well in “ultrathin notebook” designs, he thinks.

With improving yields for Llano out of GlobalFoundries, moreover, Lipacis sees the prospect for improved gross margin. He raised his 2012 EPS estimate to 65 cents from 61 cents, though he cut his 2013 estimate to 75 cents from 82.