| | | Chip Maker Micron's Downbeat Forecast Points to Pain for Industrial Stocks -- Barrons.com
2:35 PM ET 12/19/18 | Dow Jones
Memory-chip maker Micron Technology gave a gloomy outlook Tuesday evening that knocked its shares about 4% lower by Wednesday afternoon. That is not good news for some industrial companies that have been talking up data-center and electronics growth recently.
3M (ticker: MMM), which sells cooling fluids and optical cable to data-center operators, called the growth in that area "explosive" at its analyst day in November. 3M. And Eaton (ETN) said recently that the data-center market should have "another robust year" after a strong 2018.
Both of those outlooks appear a little optimistic in light of Micron's results. The chip maker is cutting its capital-spending budget from $10.5 billion to $9.3 billion due to what it called "weakening demand" from its customers.
Neither 3M nor Eaton immediately responded to a request for comment.
Barclays industrial analyst Julian Mitchell estimates that about 10% of 3M revenues come from sales to the electronics and data-center markets. Information-technology markets -- including data centers -- represent 15% of total demand for Eaton, he estimates.
The news from Micron (MU) is yet more evidence that the industrial economy is slowing. That begs the age-old question: Is the bad news already reflected in industrial firms' stock prices?
Clearly, shares of both Eaton and 3M reflect some negative economic sentiment. Eaton is trading at 11 times earnings, down from a price/earnings ratio of about 15 times at the start of the year. The stock has fallen about 12% year to date.
3M shares trade at a higher multiple -- about 18 times next year's estimated earnings -- but the stock is down more than Eaton in 2018, with a 17% decline.
The Micron update wasn't all bad news. Micron characterized the slowdown as an inventory adjustment and said that business is good in areas such as the auto industry and Internet of Things. Inventories should reach a more normal level by mid 2019, it said.
Industry's increasing need for chips remains a secular theme, as companies work toward vehicles that can drive themselves and try to use artificial intelligence on the shop floor.
Micron reports that memory going into automotive and industrial end markets will grow between 25% and 30% a year from 2017 to 2021. The need for chips will grow as cars become more autonomous, it says.
A vehicle equipped with Level 3 autonomy -- the midpoint of a five-level scale -- has twice as much dynamic random-access memory, or DRAM, as a car manufactured today. It needs 32 times as much NAND, or flash memory, according to Micron.
In practical terms, Level 3 automation means a car handles some complicated driving tasks on its own. Level 5, or full automation, requires another step up in computing power.
Like Micron, 3M and Eaton will benefit from moves toward smarter cars and smarter factories. And these trends will benefit other industrial companies as well. Rockwell Automation (ROK), Cognex (CGNX), and Fortive (FTV) are among them.
Right now, however, investors are focused on the short-term outlook for growth. And the current economic deceleration has the industrial components of the S&P 500 down 15% in the fourth quarter.
Investors just need to be patient. There are powerful trends that will create value for shareholders down the road. |
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