Micron May Not Be Good Meal for Bears
By Thomas Lepri
Staff Reporter
10/3/00 8:12 PM ET
Bearish investors waiting for the latest death tell on the PC industry are licking their chops ahead of Wednesday afternoon's fiscal fourth-quarter earnings report from memory supplier Micron Technology (MU:NYSE - news). But few close observers of that stock are worried about any problems with Micron's bottom line.
That may sound odd, given the recent performance of a market that is crucial to the company's success, the market for dynamic random access memory, or DRAM. Micron makes the overwhelming bulk of its money on DRAM, and DRAM prices have been tanking lately.
Prices in the spot DRAM market, in which memory chips are sold for immediate delivery, were already languishing before Intel (INTC:Nasdaq - news) issued its memorable revenue warning two weeks ago. By the middle of September, 64-megabit DRAM (the industry benchmark) was trading between $7.50 and $8, well off its spring highs.
But things got considerably worse on news of extremely weak demand for Intel's products in Europe. Because chipsets and motherboards mainly go into the same end market as memory -- the PC market -- Intel's troubles quickly spilled over into the spot DRAM market. Major PC manufacturers that had been hoarding DRAM in anticipation of a year-end shortage suddenly had no good reason to continue holding that inventory, and the price of 64-megabit memory tumbled to near $6 as they unloaded their stock.
'Locked Up'
Luckily, Micron's quarter ended in August, before Intel shook up the DRAM market.
"They've locked up the quarter a bit ago," says Jack Geraghty, an analyst at Gerard Klauer Mattison who rates Micron a buy. The 26 analysts polled by First Call/Thomson Financial expect the company to earn 96 cents a share, compared with a loss of 4 cents a share a year earlier. Says Geraghty, "the real worry is what we're going to hear them say about the outlook." (GKM has no underwriting relationship with Micron.)
There are a number of things Micron investors will want to hear from Chairman and CEO Steven Appleton on Wednesday. They'll want to hear that the company is seeing a strong order book going in the current quarter. They'll want to hear that overall demand isn't as poor as Intel's and Apple's (AAPL:Nasdaq - news) warnings have many fearing, and that the favorable supply/demand dynamic most expect 2001 to bring remains intact. Perhaps most importantly, they'll want to see Micron exhibit some confidence that the recent downtrend in spot DRAM will be arrested.
Short-Term Irrelevance
Analysts generally maintain that short-term fluctuations in the spot market are irrelevant to Micron's fortunes. The company gets its revenue not from the spot market, but from contracts that major customers like Dell (DELL:Nasdaq - news) set in advance, and contract prices for DRAM have lately been hovering about $1 above spot. But the longer spot prices stay depressed, the warier investors should get.
"At the EPS level, [the spot market] has no impact," says Bernstein analyst Vadim Zlotnikov, who rates Micron an outperform and whose firm hasn't done any underwriting for the company. "But in the medium term, if you have spot going down during a seasonally strong fourth quarter, that's surprising. It causes people to extrapolate. The gap between spot and contract never stays wide for too long." PC manufacturers can renegotiate the terms of contracts when industry conditions warrant.
Micron doesn't need a major spike in DRAM to increase its earnings. The amount of DRAM manufacturers stuff in PCs has historically tended to rise about 10% per quarter. And because the size of chips is continually shrinking, thus increasing the number of chips that can be produced from a wafer of a given size, manufacturers manage to continually lower production costs. A mere stabilization of DRAM prices could be good enough to smooth things over.
"They'd do very well if [contract] prices stabilize here in mid-$7 to $8 range," says SG Cowen analyst Rick Billy, who rates Micron a buy, his firm's second-highest rating. "They'd just coin money." (SG Cowen has not underwritten Micron.)
Or Maybe Not
But there are a number of reasons why Micron might not be coining money. PC manufacturers may still have significant DRAM inventories that have yet to make their way to the spot market. DRAM-per-PC growth could slow. The weakness in PC demand could get much, much worse.
But the downside risk in Micron is considerably less than it was just a short while ago. Without having verbalized any caution on its revenue or earnings outlook, the company has lost more than 50% of its market value since late August. That whipping has made Micron one of the cheaper semiconductor plays around, the stock having closed Tuesday at $43.06 -- about 19 times estimated 2000 earnings, according to First Call, and just nine times what the company is expected to earn in 2001.
SG Cowen's Billy believes that if other key data points stay positive, PC growth would have to collapse to make a big difference for Micron. "Ten percent unit growth would be sufficient," he says. "No unit growth would be a problem."
--------------------------------------------------------------------------------
Send letters to the editor to letters@thestreet.com.
Read our conflicts and disclosure policy.
Order reprints of TSC articles. Top
RELATED STORIES |
