Since you folks seem to talk about Micron quite a bit, this is from Barron's Online...
John
August 9, 1999
For Micron, The Trend Is Its Friend
Again
By Carolyn Whelan
What goes up must come down -- and vice versa.
Take prices of direct random access memory chips, or DRAMs,
which essentially contain the short-term memory of personal
computers. After a long period of weakness -- caused primarily by
the Asian economic crisis -- they're suddenly on the rise, again. And
unlike earlier advances, this price increase may have some staying
power.
"In a little over a month [they've] gone up 50% in
price," says David Wu, analyst at ABN AMRO.
In some cases, even more. DRAM prices in Asia
are as high as $7 today -- up from just $3.80 four weeks ago,
according to Greg Mischou, senior semiconductor analyst at
Warburg Dillon Read.
That's good news for Micron Technology, a company that has
certainly had its ups and downs -- more of the latter, actually -- since
we wrote a positive story about it earlier this year (see Weekday
Trader, "Throwing the Chips out with the Bath Water," February 18).
"By the end of this year they'll be
the world's largest DRAM producer
in unit volume," explains Wu, who
raised his rating on the stock to
Buy from Outperform in June. "And
they are generally acknowledged
as the low-cost leader, which is
important if you are selling
commodities."
Perhaps that's why Peter Wolff, an
analyst at ING Barings raised his
rating on Micron Technology to Buy
from Hold Monday, and dramatically upped his earnings estimates
for fiscal 1999 and 2000. The stock rose two points on the day.
The doubling of random access memory in PCs, even on the low
end (where it's going to 64 MB from 32 MB), bodes well for the
company, too, says Mischou, who also rates Micron a Buy.
"[Micron is] best positioned in 64 MB," says Mario Morales, director
of semiconductor research at the International Data Corp. "They are
the leader in both production and cost efficiencies."
Back in February, when Micron stock sat at 62 7/16, only a few
notches below today's 67 13/16, Weekday Trader said bad news
about slowing revenue growth at Dell Computer and cuts in
microprocessor prices by Intel shouldn't have dragged Micron down,
too, because future PC sales growth looked solid, and the increased
use of graphics would accelerate demand for memory chips.
Initially, the stock rallied nicely to peak near 80. But a
wider-than-expected loss in Micron's fiscal third quarter (which the
company blamed, in part, on cutthroat pricing and lagging PC
purchases) sliced the stock price in half from March to July, when it
touched down at 34 ½.
Today, however, a healthy rebound in DRAM pricing is being driven
by the usual seasonally strong demand for PCs, as students go back
to school, Europeans return from their long vacations, and the normal
midyear model changes kick in, says Mischou, a trend that should
continue to Christmas. But some say the tight supply will last for the
next year or so. The reason? Industry consolidation.
"A few years ago," explains Mischou, "a dozen companies were
chasing the DRAM market." But in the last year, Micron bought
Texas Instrument's DRAM operations, Hyundai merged with LG
Semiconductor and Hitachi and NEC teamed up on a joint venture.
Together, those four companies now account for over the 70% of the
market.
Keeping prices high, too, are a shrinking supply of DRAMs as Asia
continues to recover from its economic crisis. (Three of the four top
DRAM suppliers are Asian companies). "Inventories are fairly low at
Korean and Taiwanese manufacturers," says Mischou. That should
slow the growth of DRAM capacity in the quarter ending August 31
to 18% over the May quarter, which posted a 25% increase from the
previous quarter. Morales expects to see "spot shortages that will
keep prices up going up in the short term," he says.
And Micron is poised to benefit from those rising prices.
"They're among the best positioned of all DRAM manufacturers,"
says Mischou. "This business is about having the best cost structure,
and they are the furthest along in their migration to 0.18-micron
technology."
That technology allows manufacturers to shrink chip sizes, to
produce more chips per wafer, better yields and a better cost per
chip. "From a production and operational standpoint they're
awesome," says Osha.
The stock's recent moves have been pretty awesome, too. Almost
doubling from their recent lows, the shares are still 15% off their
52-week high near 80. The company isn't expected to make money
this year, but its P/E of 18x projected earnings of $3.72 for the fiscal
year ending in August 2001 is about the same as its projected 18%
long-term earnings growth rate, according to First Call. Still, it's at a
discount to its five-year average P/E of 24x.
But the stock probably has more room to move up, especially if
pricing stays stable or increases. "Over the next 12 months, supply
will not expand quickly enough to keep up with demand," says
Joseph Osha, an analyst at Merrill Lynch Global Securities, who also
rates Micron a Buy.
The main risk in the stock, of course, is if supply increases enough
quickly enough to weaken DRAM prices again.
"These products do extremely well when the market is tight," says
Mischou. "But when the market goes into oversupply, there's not a lot
of differentiation."
That pricing volatility can be so sharp it makes Wu compare buying
Micron stock to playing poker. "It's probably only good to own two out
of five years," he says. "In an overinvestment period, the stock could
go down." But if you own it in the right years, "you make a lot of
money," says Wu.
More and more investors seem to be concluding that for Micron the
lean years are history and the fat years are upon us again. |
