Company Analysis: Advanced Micro Devices (AMD) Limited
About the paper
The paper is commissioned to provide an extensive discussion about the liquidity, profitability and debt situation of Advanced Micro Devices (AMD) Limited. While the liquidity analysis shall be sourced for unearthing the trend analysis for the past three years, the discussion on the debt situation, and how the bonds of the company are performing, is mechanized to assist the potential investors in taking an investment decision, i.e. whether the ongoing performance of the bond justifies investment in the bonds of the company or not.
About the company
Founded in the year 1969, Advanced Micro Devices is an American semi-conductor company that develops computer processors and is the sole competitor to industry behemoth, Intel. Popularly known as ‘AMD’ in the industry, the company develops computer processors, and has recently expanded its product line offering microprocessors, graphics processors, chipsets, personal computers, et cetera.
While the company competes with Intel for central processors market with Intel, it dominates the graphic processing chips market.
Liquidity Trend
In order to access the ability of the company to honor its short-term payments, we analyzed the liquidity ratios for the past three years, and in order to do so, we calculated the following two ratios:
i)Current Ratio: Current Assets/ Current Liabilities
ii)Acid Ratio: (Cash + Receivables)/Current Liabilities
Referring to the above analysis, we found that over the period of three years, the liquidity position of the company has slowly and steadily turned strong. Beginning with the current ratio, during 2013, the multiple increased from 1.62 to 1.78, amid 27.33% in the current assets, while the current liabilities increased by 15.81%. The trend continued in the following year also, as during 2014, the multiple surged further to 1.90, but this time AMD Limited witnessed marginal fall in their current assets by 5.13%, while the current liabilities plummeted by 11%, thus fueling the current ratio of the company.
We even tested the liquidity position of the company using the stringent measure of acid ratio, and again found enticing results here. Beginning with the year 2013, the ratio multiple of the company increased from 0.84 to 1.05, amid strong increase in the cash and accounts receivables. During 2014, the acid ratio multiple increased to 1.13, primarily because of significant fall in the current liabilities by 11%, while the cash and accounts receivables declined marginally by 7.36% and 1.68%, respectively.
Bond Summary
At present, AMD has a total of $5 billion outstanding. Below disclosed are the multiple bonds issued by AMD along with their salient features relating to maturity, price, coupon rate, et cetera.
Change in Yield to Maturity (YTM)
Assuming all the other factors constant, since there was no change in the interest rates in US market during the past one year, the Yield to Maturity (YTM) of the above bonds has been constant.
Bond Selection
Relative spread to sovereign bonds
i) Bond Name: AMD 6.75%
YTM: 10.27%
Maturity Date: 3/1/2019
3 year Treasury bond yield: 1.08%
Spread: 10.27%- 1.08%= 9.19%
ii) Bond Name: AMD 7.75%%
YTM: 7.17%
Maturity Date: 8/1/2020
5 year Treasury Bond Yield: 1.69%
Spread: 7.17%- 1.69%= 5.48%
iii) Bond Name: AMD 7%
YTM: N/A
Maturity Date: 7/1/2024
iv) Bond Name: AMD 8.125%
YTM: N/A
Maturity Date: 12/15/2017
v) Bond Name: AMD 7%
YTM: 10.02%
Maturity Date: 12/15/2024
10 year Treasury bond yield: 2.31%
Spread: 10.02-2.31= 7.71%
Bond Re-valuation and Holding Period Returns
i) Bond Name: AMD 6.75%
N= 3 years, PMT= $6.75, FV= $100, I/Y= 10.27%
PV of Bond (using financial calculator) = $91.28
Holding Period Return for 1 year: (91.28-89.2+6.75)/89.2= 9.90%
ii) Bond Name: AMD 7.75%
N= 5 years, PMT= $7.75, FV= $100, I/Y= 7.17%
PV of Bond (using financial calculator) = $102.36
Holding Period Return for 1 year: (104.56-102.36+7.75)/104.56= 9.51%
iii) Bond Name: AMD 7%
N= 8 years, PMT= $7, FV= $100, I/Y= N/A
Since YTM of bond is not available, we cannot calculate the price.
iv) Bond Name: AMD 8.125%
N= 2 years, PMT= $8.125, FV= $100, I/Y= N/A
Since YTM of bond is not available, we cannot calculate the price.
v) Bond Name: AMD 7%
N= 9 years, PMT= $7, FV= $100, I/Y= 10.02%
PV of Bond (using financial calculator) = $82.62
Holding Period Return for 1 year: (82.62-82.20+7)/82.2= 9.02%
-Observations
Referring to the above calculation, we can see that while two bonds were trading on discount, and other one trading at premium, as the bonds are reaching close to their maturity date, their value reach close to par value. In addition, the bonds carry significant yield spread relative to sovereign bonds, indicating high risk involved.
-Recommendation to short-term investors
Since the investor has expressed his desire for an investment for the period of 2-3 years, we can suggest the 3 year AMD 6.75% bond due for maturity in the next three years. We assume that the investor is ready to take a high risk, for which he will be compensated in the form of high returns.
-Recommendation for Sovereign Wealth Fund
Since the investment pool of Sovereign Wealth Fund is created to generate returns for the economic growth and welfare of the citizens, it is always advised to invest in low risk securities. Therefore, I will not recommend investment in the bonds of AMD Limited to a Sovereign Wealth Fund as bonds of this company carry significant risk.
-Recommendation for Pension Fund
Majority of the companies prefer investment in long-term bonds as this assist them in matching their returns to the future pension commitments to the employees. In addition, investment in long-term bonds through which companies can match their assets and liability position, also limits the volatility of the entity’s pension obligations.
Hence, considering the above rationale, we will recommend any bond of AMD limited to be include for the pension fund of the company as the entity do not have long-term bonds, and even the existing ones carries significant risk with low credit quality.
Cost of Equity
In order to calculate the cost of equity of the company, we will be using the CAPM Model, while the calculations will be based on the following formula:
Cost of Equity= Risk free rate+ beta (Market Risk Premium)
= 2.31+ 2.66(4.14)
= 13.32%
Here:
Risk free rate= 2.31%
Beta= 2.66
Market Risk Premium= 4.14%
Growth Rate
In order to calculate the growth rate of the company, we will us the constant growth model, where the growth multiple will be derived using the following formula:
Growth Rate = 100 × (P0 × r – D0) ÷ (P0 + D0)
Note: Since AMD do not pay dividends, we are unable to calculate growth rate of the company
Works cited
Bonds: Advanced Micro Devices. n.d. Web. 23 July 2015. http://quicktake.morningstar.com/StockNet/bonds.aspx?Symbol=AMD&Country=usa.
Market Risk Premia. n.d. Web. 23 July 2015. http://www.market-risk-premia.com/market-risk-premia.html.
Profile: Advanced Micro Devices. n.d. Web. 23 July 2015. https://in.finance.yahoo.com/q/pr?s=AMD.
Summary: Advanced Micro Devices. n.d. Web. 23 July 2015. https://in.finance.yahoo.com/q?s=AMD.
US Treasury Yields. n.d. Web. 22 July 2015. http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield.
