February 2, 2015

Valens Highlighted In Barron’s – UAFRS Highlights That AMD’s Credit Risk Is Being Materially Overstated By Markets


This week Valens was highlighted in a Barron’s article discussing how UAFRS-based metrics signal AMD’s credit risk is being mispriced, as well as efforts by newly appointed CEO Lisa Su to diversify and improve AMD’s operations. While credit default swaps are trading in the low 600s, levels suggesting AMD is in real financial distress, this risk pricing is not reflective of AMD’s underlying fundamentals.

Uniform Adjusted Financial Reporting Standards (UAFRS) based metrics reveal AMD has much safer fundamentals than as-reported metrics would suggest. As we highlighted last fall in an article on Seeking Alpha, AMD has robust UAFRS-based cash flows relative to operating obligations and a sizeable expected cash build. Moreover, the firm has a multi-year debt runway, sizeable market capitalization, and robust UAFRS-based recovery rate, which should allow the firm to access credit markets and refinance if necessary.

With such clear factors indicative of the firm’s safer credit profile, one may wonder what the market is missing. The answer lies in Valens’ use of UAFRS, which remove accounting distortions found in GAAP and IFRS. When using traditional as-reported financials, earnings are understated because the traditional calculation of net income does not recognize the firm’s investments in R&D as part of its operating investments. This violates one of the core principles of accounting, where expenses should be recognized in the period when the related revenue is incurred. R&D investment is an investment in the long-term cash flow generation of the company, and as such should be capitalized, not expensed. Moreover, the incorrect deduction of R&D investments as expenses makes it near-impossible to objectively compare the firm to its peers and even to its own historical performance.

While treatment of R&D expenses is the largest driver of the dislocation between AMD’s UAFRS and GAAP financials, other distortions include the treatment of operating leases, special items, and stock option expense amongst others. By using UAFRS, Valens removes the financial statement distortions and miscategorizations of GAAP. Some of these can be automated through consistently applied formulas; however, many must be made manually. Manual adjustments that cannot be automated include mergers and acquisitions accounting, special charges, business impairments, and others.

The practice of creating consistent, apples-to-apples comparable measures of financial performance is often considered either tedious or overly complex by even seasoned financial analysts. However, Valens Research provides regularly updated, economically relevant and reliable corporate performance, equity valuation, and credit analytics by deconstructing and then reassembling each company’s financial statements into Uniform Adjusted Financial Reporting Standards (UAFRS) for each of more than 4,000 companies around the world.