Sunday, January 22, 2006

AMD's 2005 EPS adjusted by excluding Spansion

Since Spansion has been IPOed, it's useful to trace back 2005 and look how AMD did if Spansion was excluded. According to AMD's 4Q05 report, excluding the results from Spansion, AMD had operating income of $543 million for 2005, or $1.49 per share.

However, to compute net income, we need to substract the interest costs and taxes. A better way is to use AMD's financial statement filed in December 2005 which adjusted for Spansion. From Q1 2005 to Q3 2005, if Spansion is excluded, then AMD's net income would have been $225 million. Then we add the net income for AMD prime from Q4 2005, which had operating income of $268 million, substract interest cost of about $20 million, 4Q05 net income should be around $240 million. Therefore, we reach a net income of $225+$240 = $465 million for AMD prime in 2005(AMD's paid almost zero taxes).

In summary, net income for AMD prime in 2005 was about $465 million, with 409 million dilute shares, this is a EPS of $1.14. Based on AMD's Jan 20, 2005 price of $35.50, AMD prime's trailing P/E is 35.5/1.14 = 31.

Please note I did not consider the non-cash charge due to AMD's reduction of holdings on Spansion from 60% to 37+%. Our goal was to assume that there was no Spansion in AMD in the first place and compute its 2005 EPS.

2 Comments:

Anonymous Anonymous said...

Please, I know we're trying to look forward, but the way you've written this is too convenient from an accounting perspective. It's always nice to think of what might have been if nothing had gone wrong, but you style pushes the envelope a bit. As shareholders of AMD, we do need to look at the whole truth in order to understand the company we now own. Part of that truth is that we have a very different company than we did at the beginning of the year. Running the scenario with the changes included is, of course, an excellent way to start building a model for the health of the company as we own it now. However, the company we own now is not the one from this scenario. AMD did lose money on Spansion before spinning it off. AMD did take a non-cash charge from that spinoff. I know you do not refute these events. This is why I'm only skeptical of your style. It connotes thinking such that every malefactor should be written off in hindsight in order to gain perspective on what the best-case scenario would be as if that best-case can be generally expected in the future. The company we now hold is much healthier that it was at the beginning of the year, but it will still face challenges that will inevitably affect its bottom line.

6:55 PM, January 22, 2006  
Blogger Sharikou, Ph. D said...

I think my approach was valid. Since going forward Spansion is no longer a factor, it is thus useful to see how the AMD prime did in 2005 if Spansion had not existed. This would provide a reference point for estimating AMD's performance in 2006. Forward PE is the determining factor in share price.

10:04 PM, January 22, 2006  

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