The Zacks Analyst Blog Highlights: Celgene, Advanced Micro Devices, Seagate, Western Digital and Intel

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Jan 26, 2012, 09:30 ET

CHICAGO, Jan. 26, 2012 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include Celgene Corporation (Nasdaq: CELG), Advanced Micro Devices (NYSE: AMD), Seagate (Nasdaq: STX), Western Digital (NYSE: WDC) and Intel Corp (Nasdaq: INTC).

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Here are highlights from Wednesday's Analyst Blog:

Earnings Preview: Celgene

Celgene Corporation (Nasdaq: CELG) is set to unveil its fourth quarter and full year 2011 results on January 26, 2012 before the start of trading. The Zacks Consensus Estimate for the fourth quarter is 95 cents (year-over-year increase of 53.2%) on revenues of $1,289 million (year-over-year increase of 20.9%).

For 2011, the Zacks Consensus Estimate is $3.33 (year-over-year increase of 38.2%) on revenues of $4,827 million (year-over-year increase of 33.3%).

Third Quarter Recap

Celgene's third quarter 2011 earnings (excluding special items but including stock-based compensation expense) of 90 cents per share beat the Zacks Consensus Estimate by 4 cents and the year-ago earnings by 25 cents. Higher revenues boosted earnings in the quarter.

Total revenues climbed 37% to $1.25 billion in the third quarter of 2011. Revenues were boosted by the impressive performance of Celgene's cancer products Revlimid and Vidaza.

Surprise History

Celgene has surpassed earnings estimates in two of the last four quarters. The company recorded a maximum positive surprise of 12.79% in the third quarter of 2011. On average, the earnings surprise was 2.09%.

Our Recommendation

We have an Outperform recommendation on Celgene. We believe that Celgene, driven by its impressive oncology portfolio, expansion efforts, strong balance sheet and robust pipeline, will outperform the broader market in the coming quarters.

Our optimism is justified by the Zacks #2 Rank (Buy rating) carried by the stock in the short run.

Few Bright Spots in AMD's Q4

Advanced Micro Devices (NYSE: AMD) reported fourth quarter loss of 10 cents a share, widely missing the Zacks Consensus Estimate of earnings of 16 cents. Investors clearly expected the company to be impacted by the conditions in the PC market, so shares lost just 2.91% in after-hours trading.

Revenue

AMD's revenues in the last quarter came in at $1.69 billion, flat sequentially and up 2.5% from the year-ago quarter. HDD shortage at Seagate (Nasdaq: STX) and Western Digital (NYSE: WDC) threw the PC market put of gear and prevented the company from meeting its guidance of a 3% sequential increase (at the mid-point).

Revenues also missed consensus expectations of $1.72 billion by 1.7%. AMD clearly benefited from strength in its new products Brazos, Bulldozer and Llano. However, the company appears to have fared worse than Intel Corp (Nasdaq: INTC), which reported last week.

Revenue by Segment

Computing Solutions was 77% of AMD's sales in the last quarter, up 1.8% sequentially and 7.4% from the year-ago quarter. Similar to the September quarter, segment was performance was helped by an increase in processors and chipsets for servers, as well as increased shipments of the Llano APU. AMD obviously lost ground in traditional computing systems, which may not be such a big concern, given the current trends.

AMD's graphics business generated the remaining 23% of its sales, down 5.2% sequentially and 9.9% from a year ago. Despite the seasonal increase in revenue from game consoles, AMD was impacted by the decline in mobile GPU chipsets. Overall volumes declined, with a slight positive impact from mix.

Margins

AMD reported a pro forma gross margin of 45.7%, up 98 basis points (bps) from the previous quarter and 65 bps from the year-ago quarter. The gross margin benefited from higher ASPs, as AMD saw positive mix in both segments. While the Globalfoundries issue continues, AMD stated that it was in the process of working out a satisfactory arrangement.

Operating expenses of $601 million increased by around 1.5% sequentially although they were flat with last year. The operating margin expanded 153 bps sequentially and 162 bps year over year to 10.2%. While all expenses declined as a percentage of sales from both the previous and year-ago quarters, cost of sales declined the most.

Both the segments—Computing Solutions and Graphics—did well. Computing Solutions generated an operating margin of 12.6%, up 102 bps sequentially and 514 bps year over year. Graphics generated an operating margin of 7.1%, which although up 409 bps sequentially was down 897 bps from a year ago. Mix and pricing were positives for both segments.

Net Profit

On a pro forma basis, AMD generated a net loss of $72 million, or a -4.3% net margin, compared to a profit of $95 million, or 5.6% in the previous quarter and $105 million, or 6.4% in the prior-year quarter.

Including restructuring and intangibles amortization charges, the fully diluted GAAP net loss was $177 million, or 24 cents per share compared to income of $87 million, or 12 cents a share in the previous quarter and a income of $375 million, or 49 cents a share in the year-ago quarter.

Balance Sheet

AMD has done a really good job reshaping the balance sheet. Despite the slight decline in cash flow in the last quarter, the company continued its opportunistic repurchases of debt. As a result, the long term debt dropped to $1.53 billion in the last quarter from 1.57 billion at the end of the September quarter.

The net debt at quarter-end was $251 million, compared to $253 million at the end of the September quarter and $403 million at the end of the December 2010 quarter. AMD ended with a debt to total capitalization ratio of 56.7%. The cash and short term investments balance at quarter-end was $1.8 billion, down 42 million during the quarter.

Working capital metrics remained strong in the last quarter, with inventories dropping 11.9% sequentially to $476 million and inventory turns increasing from 6.9X to 7.7X. Days sales outstanding (DSOs) increased from 49 to 50.

During the quarter, AMD generated $187 million of cash from operations, spending $87 million on capex and $51 million on repayments of debt and capital lease obligations. Management expects debt repayments to continue.

Guidance

AMD guided to first quarter sequential revenue decrease of 8% (+/- 3%), below street expectations of around $1.6 billion. The gross margin is expected to be around 45% and operating expenses around $590 million.

To Conclude

AMD started off the year reasonably well, if not in flamboyant style. We believe there are several things that should interest investors at this point. The first of these is execution.

We feel really good about a company that has been consistently delivering on its promises over the past few quarters, whether with respect to building its product portfolio, or with respect to cleaning up its balance sheet. The separation of Globalfoundries freed AMD from manufacturing pressures, enabling it to focus on R&D instead.

However, while AMD's products are being launched on schedule and it does look as if it will take some share from Intel, we need to bear in mind that Intel also has some new products lined up, which along with its growing capacity and lead at 22nm, should keep it ahead of AMD.

Cost efficiencies can only do so much; real expansion of margins is dependent on superior technology. AMD is on the right track and its new products are already helping. But there seems to still be a ways to go.

Given the continued weakness in near-term results related to issues in the PC market, we remain cautious about investment in the shares. AMD shares therefore carry a Zacks Rank of #4, implying a Sell recommendation in the short term (1-3 months). We are Neutral on a long-term (3-6 month) basis.

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