SSB Jonathan Joseph on Micron:
OVERALL PRICE TRENDS POSITIVE
Given the recent strength in pricing and the fact that Micron has raised
contract prices twice in the last several weeks, we are raising very
conservatively our forward 128Mb average price assumption from 1.50 to $1.70.
We believe this price assumption is very conservative for several reasons: 1)
Micron, along with most other DRAM makers, recently raised 128Mb SDRAM
contracts to the $1.70-1.80 range, with corresponding increases in 256Mbs, as
well. 2) Given the likely rapid conversion of the market from SDRAM to DDR
(double data rate) SDRAM over the next year, limited only by the number of
i845D chipsets that Intel can ship, DDR has in the past month spiked up
significantly. Currently 128Mb DDR is running in the low-$2.00 range for
contracts and has moved to the $3.00-3.50 range on the spot market. DDR
currently makes up only about 10% to 15% of Micron's sales, but is rapidly
rising and should equal as much as 50% of sales by mid-year. 3) Spot market
prices have been running significantly ahead of contract prices in this fast
moving market. In the November quarter, about 20-30% of the company's sales
went through the spot market, and the company was able to benefit from the
rising spot market prices in the latter half of the quarter. Currently, spot
market prices lie in the $1.75 range, and our broker contacts indicate that
pricing is likely to remain firm especially as industry consolidation and fab
shut-downs gather steam.
Structurally, we believe the DRAM market is in better shape currently than it
has been for several years to retain current prices, and perhaps see prices
rise even higher. 1) It is clear that sales of personal computers and related
components are recovering rapidly to the seasonally normal levels of growth
in calendar Q4, and should continue to see firming into 2002. This is being
reflected in current DRAM bit growth rates, which are running about 99% yoy,
compared to a long-term growth rate of about 75%. 2) Severe cash shortage in
the DRAM industry is resulting in dramatically curtailed levels of capital
spending by key players in Korea and Taiwan. A number of the major players in
those countries spent virtually nothing on new plant and equipment in 2001.
In addition, other industry leaders in Asia and Europe are planning to cut
back capital spending even further in the coming year. As a result,
production bit growth, which we estimate has grown about 70% in 2001, may
slow to only 30 to 40% in 2002, just at a time when demand is picking up. 3)
The inevitable poor economics is forcing a consolidation in the industry,
with Micron buying a Toshiba (6502-Y459, 4H) fab in Virginia, and Infineon #
(IFX-$24, 1S) on the look-out to acquire fabs as well.
DEMAND SHOWING SEASONAL AND SECULAR STRENGTH
Demand, rather than supply, has been a key driver of improved economics in
the highly volatile DRAM market. On its conference call, Micron was clear to
call the current demand a normal seasonal rebound in sales of personal
computers coupled with higher-powered systems requiring more DRAM memory to
run efficiently. Even up to the past weekend, the company recorded very
robust demand, which is somewhat later in the season than we would have
anticipated, perhaps delayed by the late October introduction of Microsoft's
(MSFT-$69, 3H) WindowsXP. We estimate average memory in a PC has grown from
about 98MB at the beginning of the year, to about 175MB currently. As
mentioned, SIA data showed that DRAM bit growth reached 99% yoy in October,
after troughing at 24% in May. This is highly unusual given the semiconductor
sector is only three months off its worst downturn in 30 years. The company
recorded a meaningful pickup in all market segments and geographies, which
suggests a broad-based rebound. Management is cautioning that its customers
are looking for a normal seasonal downturn in the February quarter, which
might be interpreted to mean about a 10% qoq decline in units. We believe the
market going into 2002 could be slightly stronger than the seasonal norm for
Micron, and are forecasting flat units next quarter. We are slightly more
positive than Micron management in believing the current price rebound is
more than just a seasonal, but is in fact the result of demand growing faster
than supply.
MICRON ON THE ACQUISITION TRAIL
Micron has done a great job in recent acquisitions, including the three
primary facilities it acquired from Texas Instruments (TXN-$30, 1M) in 1998.
Earlier yesterday, Micron and Toshiba reported that Micron was buying
Toshiba's DRAM manufacturing operations in Manassas, Virginia and that
Toshiba was exiting the DRAM business. While there was no mention of a price,
Micron has said the cost could be less than 25% of a new 0.13 micron
facility. Given that Toshiba put in about $2.1 billion in this 7,000 wafer
starts/ week fab, we figure the purchase price is in the $400M to $500M range
and that most of this will be in stock, with a very small portion in cash.
Micron's total manufacturing capacity currently stands at about 40,000 wafer
starts per week. Given that Toshiba had about 6% of the global DRAM market
share in 2000, the net effect of this action could be to reduce total global
output by several percentage points in the near term, with Micron ramping
production back up after converting and/or upgrading the production process
and when market conditions are favorable.
CHANGES IN MODEL AND VALUATION
As mentioned earlier, we have lowered our bit growth assumptions for next
quarter from up 10% qoq to flat, while we are also raising our ASP assumption
from $1.50 to $1.70. As a result of these changes, our new fQ2 revenue
estimate is $539 million, down slightly from $564 million previously. We are
also lowering our expense estimates slightly, and the net result of these
changes is that our EPS estimate for the February quarter is going up
slightly from $(0.16) to $(0.15). Going forward, we have raised our ASP
estimate for 128Mb equivalents from $1.50 to $1.70 as well. Consequently, our
new revenue estimate for FY2002 is $2.44 billion, up slightly from $2.26
billion, while our new EPS estimate is $(0.60), up from $(0.67) previously.
For FY2003, our revenue estimate rises to $4.47 billion, from $4.21 billion,
and our new EPS estimate is $1.50, up from $1.20 previously.
We believe that current valuations on Micron are very reasonable. On an
absolute price to book basis, Micron's stock is trading at 2.7x or slightly
below its 10 year average of 3.1x. Relative to the S&P 400, Micron is trading
at 0.69x book value, slightly below its 10 year average of 0.72x. Upon taking
into account that the company is on the cusp of a recovery in revenue growth,
and is once again demonstrating its ability to acquire modern manufacturing
facilities at a significant discount to their cost, while at the same time
further strengthening its dominant position in the DRAM industry, we believe
that valuation on Micron stock is currently quite compelling. We reiterate
our 1S rating, and $40 price target on the stock. |
