AMD Shouldn't Scare You

I take a lot of flak from my readers for owning and supporting Advanced Micro Devices (NYSE: AMD  ) despite a massive share price drop and heavy debt load. But the company is only a few quarters removed from its last round of consistent profits, and if new CEO Dirk Meyer can keep up his brilliant execution -- a big change from ex-CEO Hector Ruiz' multiple missteps -- then a new age of solid profits will dawn soon. And the stock also rises.

In the spirit (bad pun intended) of the upcoming Halloween season, let me show you some really scary stocks -- and a few beauties like AMD that only look like beasts at a first glance.

So what?
It's easy to find companies with blemishes on their financial statements. Some are really scary, and some are not:

Company

Total Equity (Book Value)

Altman Z Score

Daily Trading Volume

CAPS Score

Sirius XM Radio (Nasdaq: SIRI  )

($907)

-4.36

$95

**

General Motors (NYSE: GM  )

($56,970)

0.29

$336

*

Ford Motor (NYSE: F  )

($1,683)

1.06

$315

*

Linear Technology (Nasdaq: LLTC  )

($434)

3.52

$182

*****

Clorox (NYSE: CLX  )

($370)

2.72

$102

****

Dollar values in millions. Data from Capital IQ, a division of Standard & Poor's.

Throw the book at 'em
Even a negative book value doesn't always spell disaster. Clorox took on a lot of debt in 2007 to buy back nearly $900 million of its own shares. That's about 10% of the company's market cap at the time. Clorox bottomed out at $637 million of negative book value, and has rebounded nicely from there.

Someone is still buying a lot of stock in American car makers, even though Ford's stock is down 42% over the last year and GM has lost 68% of its once so imposing market cap. The numbers only get worse if you look back a few more years, and the accumulated losses weigh heavily on their book values. For comparison, AMD's stock has suffered about as badly but the company still has $1.4 billion of positive book value.

Not Robert Altman of Short Cuts fame
With an Altman Z Score below 1.8, creditors could come knocking on a company's door any minute, asking for restitution. It's an early indicator of the kind of financial trouble that leads to bankruptcy, and is calculated from components like total assets, retained earnings, working capital, and trailing operating earnings.

From that perspective, AMD honestly does look pretty bad. The Z score has dropped from 3.5 two years ago to a meager 0.08 today, based on mounting losses, an expensive acquisition, and writedowns of the new asset's book value. But there are ways to survive an Altman score scare -- just look at Sirius, which has been living with a negative score since 2005, way before the XM acquisition.

Rating the scream factor
The truly scary stocks today are the ones that can't boast enough business prospects to make up for short-term financial problems. I'm looking at you, Ford and GM. You too, Sirius -- unless you have a rabbit hidden up your sleeves that will change the whole game very soon. And Hallmark Channel operator Cron Media Holdings (Nasdaq: CRWN  ) is the scariest stock I can find -- a $536 million micro-cap backed by a negative 3.8 Z score and negative $661 book value. That's right -- if privately held parent company Hallmark liquidated Crown today, the proceeds wouldn't even cover the accumulated losses. And then there's $700 million of net debt to pay off. Stay far, far away from this one, Fool.

Financial crises come in all shapes and sizes, and I'm happy to take the particular risks involved in owning AMD today. This exercise showed me that even a semiconductor stock (boo!) with a negative book value (hiss!) can also be an official Foolish newsletter recommendation with a five-star CAPS rating (yay!) -- like Stock Advisor pick Linear Technology. There's still hope for AMD to reach that level of sophistication as well; just getting back to the February 2007 price levels at which I bought my shares would triple today's share price. It's a white-knuckle roller-coaster ride in the land of high technology, and I'm fine with that.

Further Foolishness:

Linear Technology is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns some AMD stock but holds no other position in any of the companies discussed here. You can check out Anders' holdings if you like, and Foolish disclosure is fine with risk, as long as the reward is worth it.


Read/Post Comments (7) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 25, 2008, at 2:43 PM, BottomIsIn wrote:

    Before making a decision one way or the other, I'd go look at what debt they have coming due and when.

    Anything in the next 12 months will be at drastically higher rates.

  • Report this Comment On September 26, 2008, at 3:13 AM, BeauJingles wrote:

    You've taken a lotta flak..eh? Rightly so, your technical knowledge of the product and the competitive positioning is severely lacking, your enthusiasm for their 'flawless execution' is not rooted in any reality, and your hope for sustained profitability is nowhere on the horizon.... and you wonder why you take flak? Your own numbers speak for themselves. Putting number 2 in command into number 1 and promoting number 1 to chairman of the board making it 'look like he stepped' down will not turn this ship around.

  • Report this Comment On September 26, 2008, at 5:09 AM, jedz2kX wrote:

    I'm not a die hard fanboy of AMD, but realistically speaking, AMD's products are good and even superior than Intel's in terms of technology, the only thing that's keeping them from growing is their financial instability. I bought an AMD system 3 years ago and I'm satisfied with it, Ive just upgraded my system(AMD again) last month and I'm more than satisfied with It's performace. So what's the point? If not all but at least a large fraction of computer users in the world have bought AMD products 5 years ago they might be on top of Intel right now stomping their fat heads. It's a matter of making a choice, a smarter one perhaps....

  • Report this Comment On September 26, 2008, at 10:05 AM, bigdroo wrote:

    Some of you guys simply stuck in the past and aren't paying attention to AMD's current product lineup.

    Mailinator and BeauJingles: You strike me as a pure Intel fanboys / AMD trashers. Have you noticed how AMD's new video card lineup is thrashing nVidia at every performance/pricepoint? Have you not noticed how the integrated video performance on AMD-based mainboards is leaps and bounds ahead of Intel's integrated offerings and is far more price competitive?

    These were things that Dirk Meyer was principly behind (brilliant execution?). Hector Ruiz was little more than a cartoon character that had run AMD into the ground.

    Study the *current* situation with AMD before you jump into bashing them and Anders Bylund's article.

    Investors reward companies that deliver superior products. AMD will get rewarded with or without your 2 cents.

  • Report this Comment On September 29, 2008, at 5:53 PM, ErrolNiel wrote:

    mailinator wrote: "They have never had a string of profitable Qs....say, more than 3, and I challenge you to provide evidence to the contrary."

    Agree with your comments except for this one. They did have a year and a half of profits once.

    Q2 2005 0.03

    Q3 2005 0.18

    Q4 2005 0.45

    Q1 2006 0.38

    Q2 2006 0.18

    Q3 2006 0.27

    Errol

  • Report this Comment On September 30, 2008, at 4:03 AM, viditor wrote:

    mailinator wrote: "OK, first of all, they had A profitable Q TWO YEARS AGO"

    As Errol points out, they had 6 quarters of profit just 7 quarters ago,,,

    The rest is too subjective for me, though I do think that AMD is priced well below what it's worth (also subjective).

    Then let us no forget the lawsuit, which Wells Fargo originally predicted at being worth $4 Billion to AMD, and that was before Intel lost the e-mails...

  • Report this Comment On September 30, 2008, at 1:19 PM, rnicoll wrote:

    As a techy who trades, AMD is very much a company I'm watching right now. While their processors don't match Intel in raw speed, their chipsets and processors are considerably better (about half the TDP) than Intel at power consumption while at low load. Combine with being significantly cheaper, and you're looking at a very cost effective product at a time when people will be looking to save money, both directly and in energy costs.

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