Credit Suisse note on MU released today:
Micron Technology Inc. (MU) OUTPERFORM [V] J. Pitzer CP: US$ 39.54 TP: US$ 90 CAP: US$ 44326.2m Last Reset, Under-Earning and Undervalued
Bottom Line. MU reports F2Q results on 03/20 AMC with a cc at 4:30 pm EST. Expect F2Q Rev/EPS at the low end of the guide, helped by end-of-quarter deals, and F3Q Rev/EPS guide of $4.60b-$5.10b/$0.80-$0.90; midpoint of $4.85bn/$0.85 BELOW Street of $5.52b/$1.32. F3Q marks the 2nd derivative bottom, F4Q the absolute bottom. Expect F4Q/FY19 EPS of ~$0.75/~$6.25 vs. Street of $1.36/$7.40. We model F2Q, F3Q, and F4Q DRAM/NAND ASPs down 18%/26% q/q, down 25%/15% q/q and down 12%/6% - and we highlight that NAND/DRAM CapEx peaked on C1Q/C2Q18, y/y bit growth in C3Q/C4Q18, implying price stability in C2Q/C3Q19. Importantly, GM trough is ~35% in F4Q vs. prior of 11/18%, helped by mix to managed NAND and MCPs and strong 1y/96L execution. We see F2Q inventory of $4.1-4.2bn up ~7% q/q and Days of 130-135 up from 109 and above all-time high of 120 days. We see the potential for modest CapEx cuts to $8.5-8.75bn vs. guide of $9.25, but see MU focused on closing the cost-gap. Lastly, NT bit shipments are well below bit consumption and against the backdrop of U.S. Cloud returning in Apr-May timeframe, supply/demand is improving and at equilibrium exiting CY19. We highlight:
Setup Compelling: We remain structurally positive: (1) Industry CapEx peaked in early 2018, (2) y/y NAND/DRAM bit production growth is slowing thru CY19, with S< D entering CY20, (3) Checks suggest 2H Hyperscale demand recovery despite 8-12 weeks of server inventory exiting CY18, and (4) SSD share gains should resume in FY20 after MU launches NVMe SSD.
SIA Misleading During Inventory Corrections: SIA (sell-in) data is weak during periods of inv. digestion; prior troughs were marked by sub-trend bit growth like CY12/13, CY15/16 and CY19E. Importantly, SIA data for Dec/Jan shows DRAM bit shipments down 15/11% y/y - the worst declines all-time (back to 1993) indicating the mkt is significantly under-shipping consumption.
Valuation Remains Attractive: MU is trading at 3.4x EV/NTM EBITDA, vs. historical avg. trough of 7.6x and 1.2x P/B in line with prior troughs as long as MU stays profitable. While MU has historically not been profitable at trough levels, we see an F4Q trough EPS of $0.75 - implying shares trading at ~13x annualized P/E and ~9x annualized exiting FY20. |
