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.
And speaking of the best ...
We're still a week away from Advanced Micro Devices'
Yesterday, as you may know if you caught my fellow Fool Anders Bylund's column, ace market analyst JMP Research warned that "AMD's long-awaited Fusion chips are failing in the marketplace." OEMs are declining to integrate the new chips into their products, and seem to prefer the tech at ARM Holdings
MKM: A tiebreaker, but not a tongue-flapper
This morning, we saw MKM Partners rush into the debate to break the tie -- and it broke against AMD. MKM initiated coverage on five semiconductor stocks this morning -- SanDisk
Why does MKM so loathe AMD? Excellent question, and I wish I could answer it. Problem is, not a single mainstream media outlet seems to know the answer. Not even the good folks at StreetInsider.com, who usually have details on all the day's major upgrades and downgrades ready when most reporters are still brewing their morning coffee. Briefing.com and theflyonthewall.com both confirm that MKM is assigning a $5 price target to AMD, but know no more than that. So it seems we're once again on our own in evaluating this rating.
What you need to know
And that's OK. Fortunately for investors, most of what we need to know to evaluate AMD is publicly available, and readily accessible on the SEC's website. If there's a difficulty, it's that the information we see may not mean precisely what it seems to mean.
Take AMD's P/E ratio for example. At 6.7 times earnings, AMD certainly looks cheap enough. Of the five stocks MKM initiated coverage on this morning, only Spansion (the one MKM rated a "buy") carries a lower P/E ratio. Problem is, AMD's not really as profitable as its P/E seems to suggest. Dig into the firm's cash flow statement, and you'll find that over the past 12 months, AMD has burned through $741 million in negative free cash flow -- even as it reported net "profits" of $724 million. Nor is this any one-time blip on AMD's record. Fact is, over the past five years AMD has burned through a combined $4.7 billion in free cash flow.
Fools, the plain, sad truth is that AMD simply isn't very good at generating cash from its business. (If it were better at this, AMD wouldn't have a balance sheet loaded with more debt than cash at a time when rivals NVIDIA and Intel are both sitting on sizable net-cash positions.)
The sadder truth is that so far, Wall Street seems to be right about where AMD's heading. Already negative from a free cash flow perspective, AMD became more so last quarter. It more than canceled out last year's Q1 positive operating cash flow with a $168 million operating cash outflow for Q1 2011. With capex spending largely stable quarter to quarter, this meant AMD's free cash flow for the last 12 months became more negative rather than less -- even as the company reported earning a massive $510 million net "profit."
Unless AMD can get its act together, and show us that it sees the problem and is taking steps to fix it, and reverse the cash burn in next week's report, I'm going to have to side with the Wall Street majority on this one: No matter how low AMD's P/E looks, the stock remains a "sell."
Will AMD fix the problem, and prove both Rich and Wall Street wrong? Add the stock to your watchlist, and see how AMD does when earnings come out next week.
Fool contributor Rich Smith owns shares of SanDisk and Micron. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 555 out of more than 170,000 members. The Motley Fool has a disclosure policy.
The Motley Fool owns shares of Qualcomm, while Motley Fool newsletter services have recommended buying shares of and writing puts on NVIDIA. Also, The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Intel, and Motley Fool newsletter services have recommended creating a diagonal call position in Intel.
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