Ken,
An interesting article on MU. I don't think the inventory problems are over. Maybe the PC world is looking up a bit but I think thats only because prices have come down.
Joe
No News Shouldn't Have Been Good News for Micron
By Adam Lashinsky
Silicon Valley Columnist
Originally posted at 7:00 AM ET 3/23/01 on RealMoney.com
Something smells fishy in the world of chip stocks -- whose representative measurement, the Philadelphia Semiconductor Index, rose 12% Thursday -- and a good place to look for the odor would be memory-chip maker Micron Technology (MU:NYSE - news).
See, in most environments, when a company trades at a rich historical valuation, fails to report completed financial results because of an unspecified accounting issue at a subsidiary, and says mostly that business has stopped getting worse (as opposed to markedly improving), its stock goes down. That wasn't the case for Boise, Idaho-based Micron, whose shares jumped 11% Thursday to $46.70 on heavier-than-average trading volume.
There was good news to report. Semiconductor sales for the fiscal second quarter ended March 1 were $1.05 billion, a little more than most analysts expected, but down 13% from the year-earlier period. And the company had a slight profit on that billion in chip revenue. More, the company says its total volume of chips -- expressed in terms of "bit growth," or the aggregate amount of computing power it shipped -- increased 30% sequentially because PC makers no longer had such huge supplies of chips and therefore had to purchase new ones to make their products.
That was the good news. The bad news is that Micron didn't even produce a balance sheet because it said its majority-owned subsidiary Micron Electronics (MUEI:Nasdaq - news) couldn't get its financial data to papa in time for Wednesday's report. Micron also couldn't report fully on its bottom line because consolidated results await the figures from PC maker Micron Electronics, which now expects to communicate with investors on Friday.
Analysts on Micron's conference call Wednesday night didn't seem too concerned by the delay at the PC subsidiary. Of the PC sub's impact on Micron Technology, Vadim Zlotnikov, chip analyst for Sanford C. Bernstein in New York, suggests "it's not how the stock trades" and therefore isn't a major concern. OK, but let's agree that accounting issues of any stripe aren't typically good things.
More troubling is the analysis of the "good" news coming out of Micron about its memory chips, the gizmos that give personal computers their ability to handle multiple tasks simultaneously. Prices for the most basic kind of memory chip, dynamic random access memory, or DRAM, are down 50% year over year. But the prices have firmed of late, and Micron reported something of a surge in business in February. Close observers aren't impressed.
"We believe the recovery will be short-lived without a recovery in the global PC market, which appears unlikely," says Charles Boucher, an analyst with Bear Stearns in San Francisco. Boucher makes the observation that it's not such a big deal that Micron says its PC customers are now buying memory in relation to demand for end products, rather than holding off on purchases because inventory levels are too high. Big deal, argues Boucher: Until we know about the demand, the supply-demand equilibrium isn't that relevant.
As prices were rising Thursday, Boucher observed that a classic "technicians" rally was underway, one where traders followed each other in purchases of a beaten-down sector even as short-sellers (investors who bet a stock will fall) covered their losing bets. But looming slowdowns in Europe are a further worry for Micron, and one not reflected in current valuations, says Boucher.
As for those valuations, Boucher believes Micron isn't attractive until it falls to the mid-30s and even then would be above the level of two times trailing sales Micron typically has fallen to during downturns. Two times trailing sales would imply a price of just under $30, says Boucher, who nonetheless has a 12-month price target on Micron of $55.
Oh, while we're on the subject of the one-day-wonder chip stocks, perhaps purchasers of shares of PMC-Sierra (PMCS:Nasdaq - news) (up 18% to $37.61), Applied Micro Circuits (AMCC:Nasdaq - news) (up 23% to $24.19), Broadcom (BRCM:Nasdaq - news) (up 20% to $37.88) and other networking-equipment semiconductor makers weren't paying attention to all of Micron's conference call Wednesday evening.
For those still interested in where things are going, note that Micron effectively said the situation remains horrible for the networking-communications side of its business, which accounts for about 10% of revenue. In its call, Micron guessed that the "inventory correction" -- that's a euphemism for when its customers stop buying memory chips -- began in the communications sector a good six months after it began in PCs. As such, Micron doesn't expect the equipment companies' supply of chips to match demand until at least late summer.
Sanford Bernstein's Zlotnikov has a good way of illustrating how this will play out. The corrections for chips began first in PCs in last year's third quarter, spread to wireless products in the fourth quarter and hit networking-equipment makers at the beginning of this quarter. As night follows day, the inventory corrections will follow the same progression. That's why Zlotnikov is emphasizing PC-related companies like Intel and AMD as the first chip companies likely to come out of the downturn.
But if his logic holds, then the abovementioned networking-related chip companies -- which make semiconductors for things like routers, cable modems and switches -- will be the last to recover. And if that's the case, Thursday's great leaps forward were more transitory than permanent.
In that vein, consider the progress of relatively unscathed Maxim Integrated Products (MXIM:Nasdaq - news), which is buying Dallas Semiconductor (DS:NYSE - news). Dallas warned Wednesday of lower sales in the current quarter. Its shares rose 11% to $31.12 Thursday. Shares of Maxim, which has not warned, were up 10% to $49.56
A one-day rally does not a recovery make, and stocks that bounce on bad or moderately good news suggest something other than a bottom. |
