At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
Is AMD an A-plus?
Is now the time for AMD (NYSE: AMD ) to shine? At least one megabanker thinks so. This morning, the semiconductor analysts at UBS slapped a buy rating on Advanced Micro Devices, arguing the stock is undervalued at nine times forward P/E 0.7 time EV/sales, and that investors are missing a whole series of trends working in AMD's favor. Among others, UBS sees AMD benefiting along with archrival Intel (Nasdaq: INTC ) from a "resilient" desktop PC market. UBS further believes that AMD's new CEO will do a better job executing on the business, and in particular can help make AMD's new Trinity line of processors a hit when it arrives in Q2 2012.
All of which may be true, but are these reasons enough to justify buying AMD? UBS talks a good game, but how accurate have its guesses proven in the past? Sadly, not very.
Let's go to the tape
UBS spends a lot of time studying the semiconductor industry -- its third-largest area of coverage by number of picks made -- but so far it's been no better than a C student here. Five years of tracking the banker's performance has shown us that, while UBS occasionally hits it out of the park, on average, its semiconductor picks outperform the market only about 45% of the time:
|
Company
|
UBS Rating
|
CAPS Rating
(out of 5)
|
UBS Picks Beating (Lagging) S&P by
|
| Skyworks Solutions (Nasdaq: SWKS ) |
Outperform |
**** |
150 points |
| Applied Materials (Nasdaq: AMAT ) |
Outperform |
***** |
(11 points) |
| NVIDIA (Nasdaq: NVDA ) |
Underperform |
**** |
(45 points) (picked twice^) |
Source: Motley Fool CAPS.
^Previous NVIDIA pick was an outperform call; current pick is underperform.
While brilliant picks such as Skyworks have certainly helped boost UBS' reputation, its broader record of semiconductor underperformance doesn't lend much confidence that the banker is right about AMD today. Nor, I fear, do UBS' arguments in favor of AMD.
Valuation
Take UBS' assertion that AMD is cheap at nine times forward earnings, for example. First off, AMD currently sells for less than six times trailing earnings. If its forward P/E is nine, that means earnings will be going down in the near future -- especially as the effect of the company's settlement with Samsung stops boosting its backward-looking bottom line. (In contrast, Intel's 10.5 trailing P/E compares to a forward ratio of 9.3 -- meaning its earnings are growing.)
It's also worth pointing out that AMD's P/E is something of an accounting fiction. While reported earnings of $828 million for the past 12 months certainly seem robust, AMD's free cash flow for the period was actually -$505 million. The company's not generating cash; it's burning it.
Trinity: Three times nothing equals ...?
As for the new Trinity chip, it certainly sounds promising. But AMD faces stiff competition in mobile semiconductors from the likes of ARM (Nasdaq: ARMH ) and Qualcomm (Nasdaq: QCOM ) , and in graphics, from NVIDIA's Tegra 2 mobile chip. While UBS seems to like AMD's chances, I can't help but notice that Trinity's slated Q2 2012 introduction date is smack-dab in the middle of the period in which other analysts are forecasting an earnings drop at AMD -- which may not bode well.
Foolish takeaway
At six times earnings, and a projected 11% growth rate, AMD shares are certain to attract bargain hunters. But fighting for share in a crowded market, and hampered by a history of weak cash production, I can't shake the feeling that AMD is more value trap than value, period. My advice: Stay away. There are better ways to make money in semiconductors today. I stumbled across two earlier this month. Read about them here.
Still like AMD's chances? Think UBS might be onto something, Rich's reservations notwithstanding? Add AMD to your Fool watchlist to see who's right.
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