Assignment 3: Forecasting
Jack Welch Management Institute
Through this paper I will look to forecast Future performance of two competing Processor making companies – Intel and AMD. Intel is a global behemoth in processor/semiconductor industry, and with its revenue if 70 billion USD at the end of 2019 has been highly profit generating machine for years. While AMD with one tenth of Intel’s revenue has in recent tears got its act together under the leadership of its CEO Lisa Liu who has been at the helm since 2014 and is emerging as a promising rival in key business areas.
Analysis and recommendations conducted through this paper would look into Income statements, Cash flow statements and Balance sheets of the past years of Intel and AMD to predict the future performance and make recommendations to improve the overall business of each of these companies individually and in competition to each other.
Analysis and Recommendations
Which metrics/trends are most critical for forecasting future performance and for budgeting? To answer this, you must include an analysis of both past trend performance AND the applicability and reliability of key forecast indicators. In your response, consider:
Which company has the stronger income statement? Explain.
Which company has the stronger cash flows? Explain.
Which company has the stronger operating performance? Explain.
Past Revenue, Net income, Cash flows with Operating Performance across Assets and Inventory are critical to future Performance and Budgeting. At the Q1 2020 Earnings Intel has reported a Net income of 5.66 Billion a 42.5% growth Vs 3.97billion year ago but, has did not to give any forward indication on balance of year forecast. AMD on the other hand is predicting 20-30% increase in revenue and 45% gross Margin for 2020/
a. Intel has a stronger income statement at the end of 2019 on account of higher Income 71.97 Billion Vs 6.73 B, Higher EBITDA Margin 46.21% Vs12.58%and Higher Net Margin 29.25% vs 5.05%.
b. Intel has stronger cash flows with better Operating Cash flows of USD 33.15B at 46.06% of revenue Vs AMD’s USD 439M at 7.32% of revenue.
c. Again overall Intel has Operating performance of the two on account of better ROA and ROE, Intel also has better DSO of 36.47 Vs 83.89 of AMD. However, AMD has lower days of inventory and Better asset turnover ration on account of third-party Manufacturing.
Why are the metrics/trends in the data sets above so critical? How reliable are they as predictors of future performance?
Key metrics including Revenue, EBITDA, Net Income ratios like ROA, ROE, DSO and Asset Turnover provide key insights into past Growth, Financial health and Profitability of a company. While past performance is no guarantee for future success but is a very good indicator success into future.
In the past five years Intel has shown steady year on year growth in revenue from 55B in 2015 to 71.97Bin 2019 holding its Net income to around 29.5% (1). A strong Balance sheet with debt to equity ratio of 0.34 and a high interest coverage of 45 makes the company well suited to weather the current storm of Pandemic.
As for AMD the company has also shown a strong revenue Growth from 3.99B in 2015 to 6.73B 2019 but has been profitable for only past two years with net income improving from negative 660M in 2015 to positive 341M2019 which is only 5% Net margin of the Revenue(2). The company is forecasting 20-30% growth in Revenue but any drop in the revenue Growth due to pandemic would derail the business turnaround in progress. A low Debt to equity of 0.17 in 2019 and an improving quick ratio at 1.53 should help if revenue growth forecast holds.
Based on the data you have analyzed, which metrics would you focus on to improve the performance of the weaker company against the stronger one? Why
How would you do this? What specific financial tools would you apply? Why?
What would “realistic” improvement look like?
How would you measure success?
Based on the data Analyzed AMD presents with more areas to improve and hence can be termed as a weaker company. The biggest area of improvement I would focus on is Revenue Growth, Operating Margin and Days of Sales outstanding for the next three years.
a. AMD’s Large percentage of revenue come from a small number of customers and since it has a smaller share of market with smaller gross margin it can make inroads into Intel and NIVIDIA’s Customers(3) by offering lower price. Further as the Revenue grows AMD should focus on reducing COGS through a Mix of in-house and outsourced Supply chain Vs entirely outsourced Supply chain today. To further Improve Cash flows AMD should work with its customers to share the benefit from reducing its DSO to half from current levels.
A realistic Improvement on Revenue would be 30% year on year for the next three years (4), a 5 % Improvement in Operating Margin in 2020 with a target of 20% Operating Margin in 2023 Vs 31% at Intel. Further a target of 40 DSO which is a 50 % reduction levels from 2019 should be targeted. AMD can realistically and consistently achieve 40 DSO based on 2016-2018 results.
If you were given the opportunity to join either of these two companies as the new CFO, which one would you pick and why? In considering your answer to this question, the majority of your compensation plan will be tied to the improvements you can help to drive. Therefore, you should not base your decision on which company is currently performing better, but on which company’s performance – and valuation – has the greatest potential for growth.
Given an Opportunity I would Join AMD simply because it presents with greater potential for improvement. AMD has recently signed with Sony for its PS5 Launch and AMD processer will also power Microsoft’s Xbox (4) which means with pipeline of Revenue contracts, my Job as a CFO will be to influence a right Operating Model ( an optimal mix of inhouse Vs outsourced Supply Cain) which will improve the Operating Margin and Improve Cash flows through initiative like reducing DSO.
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