Tag Archives: AMD 2012 Convertible Bond

Market: Busy, UNG, Intel, AMD, Ugh

I haven’t been blogging because I am doing some “expert witness type” consulting for a legal firm, which of course, I can’t discuss.  So currently writing a report that will keep me swamped for the next several weeks.  So, this is just a quick entry on multiple topics, and presumes you’ve read some of my previous posts.

Ugh.  One of Abraham Lincoln’s most favorite quotes: “You can fool some of the people all the time, and all of the people some of the time, but you cannot fool all of the people all the time.”  Obviously, he wasn’t familiar with modern day political marketing, which operates on the philosophy, “you can fool enough of the people most of the time.”  The Faux Noise channel provides a running example of this.  Kudlow on CNBC is another.

UNG.  Spot Natural gas prices dropped to a $1.88/MMBtu on Friday.  It had been speculated that if it got below $2, some operators would turn off the supply.  I guess they did, because the spot price soared to $2.55 yesterday.  The October futures contract, which is what UNG owns, is at $2.82.    In the next few weeks, these 2 will get close in price.  As of the close on Monday, UNG is selling at a 19% premium over NAV. From September 12th through the 15th, UNG will sell all its October futures contracts, and buy the November ones.  The November futures contract is currently at $3.86.  UNG investors should read page 16 of the UNG prospectus on the dangers of investing in UNG when there is significant contango in the futures market, and then do the math.  The best short play, in my opinion, is to sell slightly in-the-money calls using the October and January contracts.  This is what I have done, and added to my position yesterday.

Intel. Intel announced its Lynnfield version of its Nehalem microprocessor.  For a thorough review check out http://www.anandtech.com/cpuchipsets/showdoc.aspx?i=3634.  But this announcement was expected.  The net result is a new low price for a Nehalem – about an $80 price drop.  Also, with the new platform architecture of Lynnfield, motherboard prices will also come down $50.  So more pricing pressure on  AMD.  As the price difference between DDR3 and DD2 memory drops, expect a little more price pressure on AMD.  Mobile Lynnfield processors are supposed to be announced later this month (according to various reports at the tech websites).  Intel’s IDF is also this month.  I am long Intel.

AMD. I have previously recommended a buy on this a couple of weeks ago.  2 events caused the stock to be up a lot yesterday: (1) the weekend news of Abu Dhabi buying Chartered Semi; and, (2) Barclays coming out with an overweight recommendation on AMD yesterday.  According to various web stories, AMD is supposed to have 2 key product launches this month: (1) 40nm DX11 graphics chips; and, (2) a new mobile processor and platform. As mentioned previously, I bought AMD on Aug. 17th.  I added a little to my position yesterday, at $4.58.  I do not recommend AMD at its current price.  Also, I view my long position as a short-term trade, at this point.  By February, if not sooner, I will be out of my position.  And, if it gets too high, I might turn into a short in December or January (way too many great Intel products launching in January timeframe (32nm Nehalems, Nehalem-EX, Moorestown) that will make life difficult for AMD in 2010).  As also previously mentioned, I am long AMD’s 2012 convertible, which I expect to hold until it matures.

nVidia.  As I have written previously, I am short.  And, this has been a losing position.  But I still like it as a hedge to my Intel and AMD longs.  The rationale for my short has been previously explained.  But like I said then, I could be way too early on this short.

Lowry. Lowry’s intermediate indicator has been at a Buy since August 4th.  The short-term one has been at a Sell since August 31st.  I remain cautious.

Tech: The Day After (AMD Q2 Earnings)

Most (including me) expected AMD to beat analysts’ Q2 earnings estimates and give Q3 guidance comparable to Intel’s (e.g. comparable revenue growth).  Joanne Feeney (of FTN Equity) summed it up best:  “AMD’s 2Q results met top-line expectations, but disappointed badly on margins, coming in at an adjusted GM of 27% (removes zero-cost inventory). On top of continued low fab utilization, ASPs tumbled with the sale of older 65nm CPUs and a mix shift towards lower-end PCs. Graphics sales topped our expectations, however, on higher shipments of discrete GPUs for notebooks. These come with lower price tags, though, so prices in that segment also fell and caused operating profits to turn negative once again.”  Although Joanne maintains her “Buy” on AMD, she lowered her price target from $8 to $6. Over the years, Joanne has been the most “optimistic” of the analysts that I have read on AMD.

I did add to my small AMD position after earnings (average price paid ~3.53/shr).  It is now a medium size position for me.  This is a short-term trade.  I expect to be out of this position sometime in the next 6 months, maybe even this week.  In retrospect, I think I was early.  AMD is unlikely to see much benefit from its new Tigris mobile platform (due in September), and its DX11 40nm graphics processors until 4Q09.  So, any upside in Q3 will have to come from Istanbul.  Note: 2 previous blog entries (Tech: PGR Presentation – 2c and Tech: The Bullish Case for Intel) describe why you don’t want to be long AMD stock in 2010.

As I have previously written, I have a position in AMD’s 2012 convertible.  I invested in it for the yield (~20% YTM) – not the conversion factor.  Abu Dhabi (via their investment in AMD’s subsidiary Globalfoundries) is investing in all the Fab capital equipment that AMD needs in the coming years.  So as long as AMD, the company without the inclusion of Globalfoundries, can maintain a neutral cash flow position, the convertible will pay-out in 2012.  Even though Q2 was a bad quarter, the “cash and marketable securities” for the product company (excludes Globalfoundries) went from $1.599B in 1Q09 to $1.637B in 2Q09.  So, a slight cash increase.

nVidia.  AMD’s graphics results suggest that nVidia’s results are likely to be disappointing.  Also, since AMD appears to be ahead of nVidia in ramping 40nm Graphics chips, nVidia’s results may be less than expected for the following quarter.  I currently have a modest short position in nVidia.

Tech: My PGR Presentation

As mentioned in last post, I agreed to do a keynote at a small half-day conference on June 2nd in NYC for institutional investors, put on by Primary Global Research.  If interested, you can download my presentation in PDF format:  The Investible Microprocessor Landscape: 2009 and Beyond.  My focus was on Intel and AMD.  As time permits, I’ll put up blog entries that explain different parts of my presentation. 

Here are some of the key messages: 

  • AMD Unlikely to Recover
  • Graphics: Market Transitions in 2010/11
  • Next Mobile/Server Boom Starts by Mid-2010
  • New CULV-Subsegment Stalls Netbook Growth

 W.r.t. the 1st bullet, I mean that AMD is unlikely to be profitable in any 12 month period over the next 3 years, and thus its stock price is unlikely to significantly recover as well.

 I do NOT think that AMD will go bankrupt.  Also, I think it likely that AMD, the company, (i.e. excluding Global  Foundries), will be cash flow positive in some of the quarters over the next few years.

 What happens after the next 3 years?  I don’t know.  The tech industry changes too fast to look that far into the future.

 Nevertheless, I do see an investment opportunity in AMD – not in the stock (short or long at its current price), but rather in one of the convertible bonds:  the 2012 convertible bond due August 2012, with a 5.75% coupon.  Current price is ~64.  Assuming AMD stock stays <20 (likely), the YTM is about 22%.  Rationale:

  1.  With Abu Dhabi funding the Fabs, AMD’s capital expenditures will be near zero for the next 3 years.  So they should be near cash flow neutral over the next 3 years.
  2. In 2H2012, the NY Fab should come online with 22nm.  After Abu Dhabi invested all that money, they are not about to let AMD go under just before the Fab starts producing 22nm microprocessors.
  3. It’s in everybody’s interest to keep AMD alive – clearly the OEMs, Microsoft, and Abu Dhabi.  But also Intel – the antitrust stuff will still be going then, and Intel’s case would be subjectively weakened if AMD went bankrupt.
  4. Since the antitrust stuff will likely be ongoing in 2012, the investment community will view the case as an AMD asset.  And also with 22nm about to get in production, AMD could likely sell a bond to pay off the maturing convertible in August 2012.
  5. In the off chance that AMD did file for bankruptcy, Intel shares would likely soar.  So if you also had a long position in Intel, you would be OK.  On the other hand, if Intel screws up big, and AMD executes well, AMD shares could soar (eg to 40, and since the max exercise price on the convertible is ~20, you would profit from this move).  So your AMD convertible position would provide a partial hedge to your Intel position.  I currently think that the probability of either scenario is very low.

 I’ve been trying to buy the AMD convertible (2012) since Thursday of last week.  Very difficult with Fidelity.  I finally was able to buy some on Tuesday, June 2nd.  If the convertible has a pull back to under 60, I will probably buy more.  It is in my IRA Rollover.

 I feel somewhat stupid about this.  I had all the pieces – just never connected the dots.  As soon as the Global Foundries deal closed, I should have bought the 2012 convertible then, and I would have gotten a much lower price.

My next post on this will provide some detail about why I think that AMD is unlikely to recover in the foreseeable future (i.e. the next 3 years).