Here You Go -
10:12am EDT 29-Jul-98 Lehman Brothers (M. A. Gumport, CFA 1(212)526-5368) MU
Micron Technology: Upgrading Rating To Outperform; Raising Target To $37
Ticker: MU Rank(Old): 3-Neutral Rank(New): 2-Outperform
Price: $29 13/16 52wk Range: $60-20 Price Target (old): $27
Today's Date: 07/29/98 Price Target (old): $37
Fiscal Year: AUG
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EPS 1997 1998 1999 2000
QTR. Actual Prev. Curr. Prev. Curr. Prev. Curr.
1st: 0.10A@ 0.04A 0.04A -0.55E -0.45E 0.30E 0.40E
2nd: 0.66A@ -0.36A@ -0.36A@ -0.50E -0.15E 0.40E 0.50E
3rd: 0.44A -0.41Ax -0.41Ax -0.33E 0.10E 0.45E 0.50E
4th: 0.33A -0.60E -0.55E -0.12E 0.30E 0.50E 0.60E
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Year:$ 1.53A@ $ -1.33E@x$ -1.28E@x $ -1.50E $ -0.20E $ 1.65E $ 2.00E
Street Est.: $ -1.00E $ -1.23E $ 0.34E $ -0.61E $ - -E $ - -E
@Includes 1-time: FY1Q97 $+0.03, FY2Q97 $+0.48 , FY2Q98 $+0.13, FY3Q98 $-0.10e
x-Excludes 1-time: FY3Q98 $-0.09 inventory write-down.
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Price: $29 13/16 Revenue (FY98): $3.0 Bil.
Return On Equity: NA % Proj. 5yr EPS Grth : 20.0 %
Shares Outstanding*: 219.2 Mil. Dividend Yield: 0.0 %
Mkt Capitalization: $ 6.5 Bil. P/E FY98; FY99: NM; 149x
Book*; Price/Book*: $14.93; 2.0x Convertible: Yes
Net Cash per Share: $ 3.22 Disclosure(s): None
*Includes $500 mil convertible in equity.
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* We are upgrading our rating on Micron Technology to 2 Outperform from 3
Neutral. We are raising our EPS projections for fiscal 1998, 1999 and 2000,
as well as our price target to $37 from $27 per share. Conviction on timing
is limited, but we see growing signs of reacceleration in demand to 70% annual
pace, deceleration in supply to under 40% growth, and a rebalancing of
supply/demand in the September 98-April 99 timeframe.
* Recent demand and pricing trends are slightly more favorable.
* We are now assuming a roughly stable pricing environment during the next
year.
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WE ARE UPGRADING OUR RATING ON MICRON TECHNOLOGY TO 2 OUTPERFORM.
The turn in supply/demand seems sufficiently close and valuation sufficiently
low to warrant a positive stance on the stock on a 12-month horizon. Some
early signs of improvement have emerged. It is unclear whether the recent
uptick in selected memory prices is the start of a turn, but we believe
establishing positions now will be rewarded during the next year as a more
stable pricing environment emerges.
VALUATION ATTRACTIVE. Micron typically trades at 1-2 times book value at its
trough and 8-10 times at its peak. Currently the stock trades at 2 times.
Fundamental signals have moved from clearly negative to somewhat mixed. With
the anticipated influx of cash from Micron's upcoming acquisition of Texas
Instruments' DRAM operations, financial risk has dramatically diminished.
That transaction also makes Micron the number one or number two worldwide in
DRAMs. Micron already was among the world's lowest cost producers.
WE CONTINUE TO SEE A GOOD CONCEPTUAL ARGUMENT FOR A FAVORABLE REBALANCING IN
SUPPLY DEMAND IN THE SEPTEMBER 98-APRIL 99 TIMEFRAME. Bit demand should
reaccelerate to 70%-80% growth soon, while capacity growth decelerates to
under 40%. The supply/demand gap should diminish significantly during the
next six months.
ON THE DEMAND SIDE, CONSENSUS HAS MISSED THE MAGNITUDE OF THE RECENT DEMAND
SHORTFALL AND WILL LIKELY BE SURPRISED BY THE STRENGTH OF THE SNAPBACK. Most
observers tell us bit demand growth has slowed from a year ago but remains
robust (58% above a year ago). That altogether trivializes the magnitude of
the recent demand shortfall. Bit shipments from March through May actually
decreased 13%. The decline in DRAM bits matches broad industry trends: Total
IC unit volume has been declining since July 1997. The decline reflects (1) A
necessary pause from an unsustainable growth pace in the prior year, (2) Asia
Pacific problems, (3) A slower U.S. economy, (4) Inventory overhang from a
poor Christmas 1997, and (5) A move by OEMs to build-to-order.
Industry Bit Shipments
1997 vs. 1996 +98%
5/98 vs. 5/97 +58%
5/98 vs. 3/98 -13%
Source: SIA and Lehman Brothers
THE FACTORS PUSHING BIT SHIPMENTS DOWN IN RECENT MONTHS SEEM LIKELY TO BE
SHORT TERM. WE CONTINUE TO BELIEVE BIT DEMAND GROWTH SHOULD MOVE BACK ONTO A
60%-80% GROWTH PATH IN LATE 1998. INCREASED USAGE OF DRAMs BY PCs SEEMS ON
TRACK. AND OTHER, TENTATIVE SIGNS OF IMPROVED DEMAND HAVE EMERGED. Reports
suggest Mbytes per PCs are now at 64 and rising 6% per month, so this
fundamental demand driver (75% of all DRAM chips are used by PCs) appears
intact. Our analyst in Hong , Richard Wei, reports a significant increase in
motherboard activity in recent weeks after a very poor June. Our PC analyst
Kimberly Alexy indicates the major PC makers are working through their
inventory problems. That observation is seconded by Micron who reports that
Compaq and IBM, after an absence, are again buying DRAMs and that lead times
have begun to build on PC-100 parts (PC100 chips interface with Intel P2-
366/400 and AMD K6-2+ CPUs; most chips will have to be PC-100 by early 1999).
ON THE SUPPLY SIDE, WE EXPECT A SLOWDOWN TO A 30%-40% GROWTH PACE. There are
two ways to increase capacity: (1) Technology and (2) New fabs. Long term,
technology investments can add 25% per year in worldwide capacity. It is
possible that technology is currently progressing at a faster pace (our model
does include specifically a 60% rate of technological capacity expansion at
Micron, but we consider that the exception, not the rule). Meanwhile, the
cutbacks announced nine months ago are just beginning to "bite", and all new
plant capacity is grinding to a halt.
OVERALL, DRAM PRICES ARE STILL HEADING DOWN, BUT SELECT PARTS HAVE REBOUNDED,
AND MICRON ITSELF CALLS THE OVERALL PRICING ENVIRONMENT "STABLE" SINCE LATE
JUNE. OUR NEW EPS PROJECTIONS ASSUME A MORE STABLE PRICING ENVIRONMENT.
Micron indicates that prices on 64Mb PC-100 parts have recently moved up from
$8 to $9. We believe the low point in demand growth has passed, capacity
expansion is now more sharply decelerating, and supply/demand stands a good
chance of rebalancing at some point during the next nine months. Reflecting
those signs, we now assume essentially flat DRAM pricing during the next year.
Because each $1.00 move in 64 Mbits by mid 1999 has a $0.25 per share per
quarter impact on Micron's EPS, the impact on our fiscal 1999 projections of a
stable DRAM pricing environment is substantial. We now project fiscal 1998
(August) EPS at $-1.28 (prior: $-1.33), fiscal 1999 at $-0.20 (prior: $-1.50),
and fiscal 2000 at $2.00 (prior: $1.65).
64Mbit Price Assumptions Last Qtr This Qtr Year from now
Old $10.60 $7.40 $6.70
New $10.60 $8.00 $9.00
UPGRADING RATING TO 2 OUTPERFORM; TARGET INCREASED. We confess, the upgrade
seems early. Prices overall remain under pressure, and it could still take 6-
8 months for supply/demand to significantly rebalance. But we would be
aggressive buyers on any weakness. As the industry moves to consolidate, we
are increasingly comfortable with the likelihood of better price stability
during the next year and a return to strong profits for Micron in fiscal 2000.
We believe a $37 one-year target (prior: $27) is attainable as investors look
out to long-term earnings potential.
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