Wall Street's continued infatuation with semiconductor stocks despite terrible operating results is evident in the strength of Micron Technology, the leading maker of DRAMs, the memory devices used in personal computers.
Micron shares are up 16% this year to 41.10 and have risen 3 points since June 21, when the company reported a steep loss of 50 cents a share for its May quarter. The poor results reflect the plunge in DRAM prices, which now are around $2 for the benchmark 128-megabyte variety, down from over $4 three months ago, $6 at year-end and over $12 a year ago.
The Micron news prompted some Street estimates to cut their earnings estimates for the company's current fiscal year, ending August, and the coming year ending August 2002. The consensus is for close to breakeven in the current year and almost $1 share in profits in the following year.
"People aren't thinking about this company rationally," says Bob Marcin, head of Marcin Asset Management. "This is a highly volatile, capital-intensive, marginally profitable business over the cycle that deserves to get valued at most for 15 times normalized earnings of $1 share." Normalized profits are what Micron can expect to earn on average over a boom and bust cycle. Of course, Micron trades for a lot higher than $15 a share. At 41, Micron is valued at $24 billion, not much less than Gillette.
Marcin takes aim at Micron bulls like Jonathan Joseph, the Salomon Smith Barney analyst, who recently kept his $50 price target on the stock while lowering his fiscal 2002 forecast to a loss of 22 cents from profits of $1.37 and cutting his revenue estimate to $3.7 billion from $6.7 billion. In maintaining his target price despite those cuts, Joseph effectively raised his targeted price/sales ratio on Micron to eight times from 4.5 using fiscal 2002 profits, way above the company's average of 2.5 in the past decade. The price/sales ratio is market value divided by revenues. Assuming Micron operates at a loss in its current fiscal year, it will have earned virtually nothing since 1997.
The bull case on Micron is that competition is becoming more rational as weak Asian producers exit the market. But the collapse in DRAM prices suggests that the market is a long way from becoming oligopolistic. Marcin believes DRAM prices are likely to rally from depressed current levels, but Micron's stock already discounts a sizable and sustained recovery. "If there were DRAM futures, I'd buy them, but not Micron," he says.
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