Headline: Micron Technology: Bottleneck in Testing; Projections Edge Lower (LEHMAN-1/26/98)
---------- ** ONGOING TESTING BOTTLENECK CUTS FEB. FY2Q98 BIT GROWTH PROSPECTS BY 5%; PROJECTIONS EDGE DOWN. ----------------------------------------------------------------------------- TESTING BOTTLENECK CONTINUES. Late Friday management confirmed that testing is an ongoing bottleneck. Feb. FY2Q98 bit growth had been expected to at 10- 15%, but MU indicates 7-12% is now more likely.
EPS PROJECTIONS SHAVED. In addition to the short term test issue, we also have factored into our models a slightly more favorable pricing environment (FY2Q98 16 Mbit prices at $3.05 vs. our previous $2.91 assumption) and a slightly less favorable cost structure. As a result, we now project FY98 EPS at $-0.50 (old: $-0.45). We still project FY99 at $0.40 and FY00 at $1.65.
ONGOING NEAR TERM CAUTION, BUT...Do not mistake our short term caution for a long term recommendation. We definitely believe DRAM prices will turn up within a year, and possibly much sooner (hence our close monitoring of prices). DRAM demand is strong, the supply/demand gap is likely less than consensus believes, and Korean cutbacks (they have 35% of the market) plus hesitant Japanese commitments (they have 40% of the market) will cause a sharp capacity growth slowdown within 1 year. Of the 16 chip stocks we cover, Micron is 1 of 5 selling at record low relative sales and book value multiples. During the next 2-3 years, a move up to $75 seems reasonable as Micron's position as low cost producer of high growth DRAMs is better appreciated (i.e. once Micron makes good money again). BUT UNTIL CONSENSUS EPS PROJECTIONS ON MICRON BECOME MORE REALISTIC, AND SO LONG AS THE SHORT TERM PRICING TREND IS DOWN, A NEGATIVE POSITION SEEMS ADVISABLE. The uptick in pricing seen 2 weeks ago which contributed to a good rally in MU's stock now seems over. MU's transition to 64 Mbits also has near term risks. |
