News Analysis date published New: 
Tuesday, June 29, 2010 - 10:18
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Thursday, August 15, 2013 - 04:50
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Tuesday, June 29, 2010 - 10:18

Micron Gives a Fresh Read on Semis

Tuesday, June 29, 2010 - 10:18am

Don’t let the stock action fool you. Just because shares of Micron Technology (NYSE: MU) are off more than -10% in Tuesday trading, the company’s Monday night earnings release should give a cheer to the entire tech sector -- that is, when investors are ready to once again embrace this highly cyclical industry. Right now, the whole technology group is getting no love from investors for fear that global economic pressures will kill the party before it really gets underway.

But the party has already started, if you look at the tech results we saw in the spring. Micron’s fiscal third-quarter results simply underscore the industry momentum that is already underway.

For example, Micron’s sales doubled from the year-ago quarter, and a $246 million operating loss back then has morphed into a $540 million gain in the most recent quarter. Gross margins rose from 9.7% a year ago to 37.1% this time around. (Analysts expected gross margins to be only 35% -- not because selling prices were higher than they expected, but because cost control was especially impressive). Micron’s memory chip segments (both DRAM and flash) are even more volatile than the rest of the tech sector, but many other names in the group are also posting much stronger results this year.

Trouble is, investors are focusing on what tech results look like in a bad year. And Micron surely operates in the toughest segment of tech. The company lost loads of money in each of the last three years. (Then again, it made loads of money in the prior five years). So investors are not yet ready to embrace the current operating momentum.

For investors, the real question is whether the good times can last. Short answer: a qualified yes. Future results are unlikely to show the dramatic increases we’re seeing now, but we should see yet higher sales and profits in 2011 and beyond -- assuming the global economy can keep from slipping into recession. As we noted in this piece, European economic woes are keeping many on edge.

Why should profits and margins rise from here? Micron is starting to benefit from a transition to the most advanced kind of memory chip, known as DDR3. Those chips carry far higher margins than the DDR2 chips that dominated the sales mix in the just-finished quarter. And in the coming quarters, Micron will start to see the benefits of a recently-acquired company called Numonyx, which is the largest supplier of flash memory to smart phones and other handheld devices. Demand in this area is quite strong, and should boost Micron’s profits into next year, even if the core memory businesses stay flat or grow only modestly.

"Micron now has the capacity to gain market share in memory with the combination of DRAM+NOR and NAND offering which could point to stabilizing gross margins with a solid technology lead," noted analysts at Sterne Agee.

Although Fiscal (August) 2010 profit forecasts are unlikely to move much on these results, look for the fiscal 2011 consensus EPS estimate to rise from a current $1.60 to around $2.20 to $2.40 a share. Shares trade for just four times the mid-range of that forecast.

Action to Take --> Shares are down Tuesday in large part because they rose by a commensurate amount on Monday. Investors were clearly expecting even more robust results or white-hot forward guidance. The risk/reward, though, looks quite good. Tangible book value stands at $7.32, and should rise to around $9 over the next four quarters as cash flow adds cash to the balance sheet. So further weakness appears unlikely.

And as we look to upside, shares have historically traded at around six times peak cycle profits. Even if EPS rises to just $2 next year, below the level being bandied about by several analysts this morning, shares still can rise up to $12, or about +30% from current levels. Investors may be taking profits on Micron and many other tech names right now, but further strong results coming into the July earnings season could give the sector a fresh lift.

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.

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