Boris Petersik of DLJ published a downgrade on MU on Wednesday, September 6, morning in Hong Kong. Here is the narrative from that report:
RATING: Underperf. Change: Down From Buy 12-Mo. Target: $50
VIEWPOINT
We downgrade our recommendation on Micron from Buy to Underperform on the back of a much earlier than
anticipated fall in DRAM spot prices and what we expect to be weaker contract pricing starting in the second
half of September. Although we have observed spot prices that traded below the contract rate for the past five
weeks, we discounted the weakness as result of weak low-end PC demand in Europe. It now appears that major
DRAM users are starting to draw down their inventories and possibly also releasing inventories into the spot
market. We take this as a signal that DRAM contract price upside is limited and that the danger of DRAM
shortage is no longer as serious as PC makers had expected since April. This leads us to reduce our November
quarter 64Mbit-equivalent ASP assumption from US$9 to US$8 which results in a revenue reduction for the
quarter from US$3.4bn to US$3bn. Although the November quarter EPS forecast of US$1.44 is up 45% from
the August quarter, it represents a 23% reduction of our original forecast. We therefore revise our FY01 EPS
down from US$6.24 to US$5.36 and adjust FY00 EPS down from US$2.48 to US$2.43. We reduce our price
target to US$50.0 after reducing our revenue multiple from 5 times the Nov quarter peak revenue to 2.75 times
the May quarter trough revenue.
IMPORTANT POINTS
1. The spot market has refused to lead the contract higher since early August when contract hit US$8.25. This
put a stop to the very strong contract price move since early April which saw a steady contract price recovery
from the US$5.0 bottom set in March. The contract rise had been driven by a build-up in inventory by major PC
makers in anticipation of very tight supply in the strong season.
2. It now appears that PC makers are much more sanguine about supply for the fourth quarter based on
somewhat slower PC demand due to the lack of low-end processors. This is not just resulting in some
motherboard inventories in Europe but also leading to a reduction in safety inventory levels. We expect a one-week
inventory reduction during September to channel more supply into the spot market, driving down spot
prices further and making the gap with the US$8.25 contract prices unsustainable. We therefore expect contract
to fall below the US$8.0 level in the second half of September which results in a US$1.0 reduction in our ASP
assumption for the Micron November quarter.
3. While we still forecast robust sequential revenue growth of 23% in the November quarter to US$3bn on the
back of sequential bit growth of 18%, the seasonal downturn in prices appears to have already commenced.
ASPs could be as much as 30% lower than during last year’s earthquake inflated levels which saw contract
prices of US$10.5-US$12 for much of the November quarter. We therefore expect the market to start looking
beyond the peak November quarter and assign a lower revenue multiple to the following quarter as it has done
in the past seasonal downturns. Last year, the seasonal high was reached in late September and subsequently
traded in a US$29-US$42 price range until spot prices started moving higher in early March.
4. There is always a possibility of a short-term up-tick in spot prices during October if the inventory reductions
were to be overdone in September. We would, however, not expect the spot price to show any extensive rally
until well into 2001. While the overall supply-demand balance for 2001 continues to be positive on the back of
limited capital expenditure in 1999-2000, we continue to emphasize the spot market as the key indicator which
drives stock prices.
5. On the production side, we continue to expect Micron to post above industry bit growth of close to 70% in
2001 and therefore continue to gain market share. Furthermore, the company is expected to continue to benefit
from its de-emphasis of Rambus DRAM and the re-introduction of an EDO design on leading edge technology.
We currently do not share the view of several recently issued research reports that show 2001 DRAM bit
growth as low as 40%. Based on our database of global DRAM producers, we currently peg industry bit growth
at just over 60% in 2001 vs. 80% expected for 2000. |
