Keith,
I just wanted to write the same - looks like some people already
knew that in advance.
Downgrading Memory Names to Hold
? Downgrading Memory Names to Hold — We are downgrading the shares of 3
memory companies: Micron, Qimonda, and Spansion. Our positive rating on
these shares, based largely on valuation, has simply been wrong and with renewed
risks forming in the NAND market, compounded by a highly questionable macroenvironment,
we downgrade the shares here, despite the very low valuations. Our
rating on Micron goes to 2S from 1S, Qimonda to 2S from 1S and Spansion to 2S
from 1S.
? NAND Weakness — While it is no surprise that NAND pricing is weak, results from
Sandisk add incremental concern. We note that Sandisk reported a 15% increase
in on-hand inventories and indicated channel inventories have increased to 8-9
weeks. This creates risk of further NAND pricing degradation throughout CY08
and 1H09. Comprising 35% of Micron sales, such weakness cannot be ignored,
leading us to lower our Micron estimates. Our Micron price target falls to $6.50,
driving our rating to 2S.
? Impacting NOR Demand — We expect NAND price weakness to negatively impact
demand for NOR as a NAND/DRAM combination presents an increasingly
attractive alternative. With specialty DRAM prices also suffering (as noted in
Micron's last earnings results and reflected in our QI estimate revisions), this is
even more the case. We note that in 1Q07, weak NAND pricing negatively
impacted Spansion's results; we fear the same result in 3Q08 and consequently
reduce our estimates. Our Spansion price target falls to $3, driving our rating to
2S. (Continued Below...)
(its always the same with "these analysts, prices went down,
old price targets are way too high -> what to do, downgrade
the rating and break down old price targets by a huge margin,
here:
MU from 10->6,5
QI from 6->2,5
SPSN from 5->3)
QI Hampered by Specialty DRAM — Recent weakness in specialty DRAM
pricing (comprising 50% of Qimonda's sales) lead us to lower estimates for
Qimonda. This is exacerbated by a worsening currency condition (we
increase our €/$ exchange assumption to 1.58 from 1.50 through CY08
(reflecting Citi's current view) that lowers EPS by €0.18. As we do so, our
cash balances for Qimonda fall precariously low by F2Q09 (Mar-09), making
the likelihood of a dilutive liquidity event high. Recognizing this, we lower
our price target to $2.50, substantiating a 2S rating.
? Limited Case for NT Upside — In the context of a risky macro
environment, we have been emphasizing that investors gravitate toward
quality names with solid longer-term stories. While we have some optimism
over longer-term supply conditions (given reductions in bit growth
assumptions by Sandisk and expected by Samsung), we believe near-term
demand conditions present considerable overhang. Meanwhile, financial
characteristics do not lend themselves to our quality bias. We are not
ignorant of the opportunities presented by waning supply growth and low
valuations. We look to revisit memory names on any signs of firming
demand with evidence of an improvement in supply/demand balance.
DETAILS
Downgrading Memory Names to Hold. We are downgrading the shares of 3
memory companies: Micron, Qimonda, and Spansion. Our positive rating on
these shares, based largely on valuation, has simply been wrong and with
renewed risks forming in the NAND market, compounded by a highly
questionable macro-environment, we downgrade the shares here, despite the
very low valuations. Our rating on Micron goes to 2S from 1S, Qimonda to 2S
from 1S and Spansion to 2S from 1S.
NAND Weakness — While it is no surprise that NAND pricing is weak, results
from Sandisk add incremental concern. We note that Sandisk reported a 15%
increase in on-hand inventories and indicated channel inventories have
increased to 8-9 weeks. This creates risk of further NAND pricing degradation
throughout CY08 and 1H09. Comprising 35% of Micron sales, such weakness
cannot be ignored, leading us to lower our Micron estimates. Our Micron price
target falls to $6.50, driving our rating to 2S.
Impacting NOR Demand. We expect NAND price weakness to negatively
impact demand for NOR as a NAND/DRAM combination presents an
increasingly attractive alternative. With specialty DRAM prices also suffering
(as noted in Micron's last earnings results and reflected in our QI estimate
revisions), this is even more the case. We note that in 1Q07, weak NAND
pricing negatively impacted Spansion's results; we fear the same result in 3Q08
and consequently reduce our estimates. Our Spansion price target falls to $3,
driving our rating to 2S.
QI Hampered by Specialty DRAM. Recent weakness in specialty DRAM
pricing (comprising 50% of Qimonda's sales) lead us to lower estimates for
Qimonda. This is exacerbated by a worsening currency condition (we increase
our €/$ exchange assumption to 1.58 from 1.50 through CY08 (reflecting Citi's
current view) that lowers EPS by €0.18. As we do so, our cash balances for
Qimonda fall precariously low by F2Q09 (Mar-09), making the likelihood of a
dilutive liquidity event high. Recognizing this, we lower our price target to
$2.50, substantiating a 2S rating.
Valuations Are Low... Indeed valuations are low for each of these names.
Micron currently trades at 0.71x tangible book, just above its historical trough
of 0.66x. But with tangible book expected to erode in coming quarters, we
believe trough valuations may not provide sufficient support. The same can be
said of Spansion, 0.3x book value but with a 23% decline in BV expected in the
next 8 quarters, and Qimonda, 0.41x book value but with an expected 48%
decline in book value in the next 4 quarters. Given these low valuations, a
sell-rating is not warranted noting that our price targets reflect a recovery of
share price to our targeted book value 12-24 months forward.
...as is Quality. We note that each of these companies carries noticeable
debt. Micron carries $1.9B in LT debt. While Micron is operating cashflow
positive, we do not model a return to profitability for Micron in the confines of
our model. Qimonda carries €552M of debt and is modeled to be operating
cashflow negative for the next 4 quarters. Spansion carries $1.38B in debt.
While operating cashflow positive (and expected to be free cashflow positive
starting in 2H08, we do not model profitability for Spansion until 2010.
Limited Case for NT Upside. In the context of a risky macro environment, we
have been emphasizing that investors gravitate toward quality names with solid
longer-term stories. While we have some optimism over longer-term supply
conditions (given reductions in bit growth assumptions by Sandisk and expected
by Samsung), we believe near-term demand conditions present considerable
overhang. Meanwhile, financial characteristics do not lend themselves to our
quality bias. We are not ignorant of the opportunities presented by waning supply
growth and low valuations. We look to revisit memory names on any signs of
firming demand with evidence of an improvement in supply/demand balance.
(This reports comes months too late, so nothing special ...
I would say business as usual)
BUGGI |
