David:
Whether I'm "brain-washed" or a "forever bear", is a moot point,....what counts is making money in one's trades. To this point in time, MU has been rather kind to me in spite of the fact that it has been approached exclusively from a bearish perspective.
It makes little sense to stand on the railroad track when a loud whistle can be heard, and if you check my recent posts, you might note that I've advocated a "stand-back" attitude whilst this year-end-through-January rally has been in effect. Many items, most of them based on the few fundamentals that I do understand, suggest that the risk/reward ratio is now quite favourable to the bears.
With respect to the sale of assets, no doubt it can be viewed as a coincidence that the company sold off assets on three separate occasions during the past year, as well as raised serious debt, during that same period. Sceptics, who also note the negative cash flow, cannot be blamed for being suspicious.
I heartily agree with your view that MU would happily "dump" (I love your choice of words) MUEI if a purchaser could be found. As I have noted for over a year, the box-building game has become both crowded and fiercely competitive, even as the demand growth has fallen. To MU's credit, they sold at least part of it while there were still uninformed buyers (funds) available. Today, they are stuck with the remainder, at least until the price falls (anything can be sold if the price is right). Too bad they sold so little.
Amounts of debt taken on by companies are, as you suggest, relative. My point is that the company now has a considerable annual interest expense, that they did not have last year. Cash flow last year was negative. Conditions are far worse this year. That additional expense adds to the impediments that preclude profits. Then too, there are those nasty "covenants" that are always a part of a debt agreement. Once serious debt is in place, common shareholders move to the very back of the bus. While you may not worry about debt in a cash flow negative company, I do, as debtholders frequently become majority (as in very big) shareholders when companies get into financial problems.....to the chagrin of the previous shareholders who are "diluted out" of the picture.
With respect to MU's "contract prices", I'll maintain my current delusion, (which is based on excellent industry sources), that MU has no choice but to sell at or very close to spot market prices. You might wish to check out MU management comments from their year end conference call in which they owned up to the facts that most of their "contracts" were of very short duration, and that the spot price represented a difficult hurdle. For purposes of attempting to understand MU's probable earnings, it provides an acceptable figure when averaged across the period. Shall we bet on MU's ASP for this current quarter? I know for a fact that the spot price is again heading south.
A further point.....if one is not aware of MU's cost of production, how can one ascertain whether a $4.00 ASP (or $3.00 or whatever) will provide profit or loss? Do you have a cost of production figure with which to work? Many who follow MU have worked out what is probably a reasonably accurate approximation (in the absence of company-provided info). The figure that I have derived suggests that at current spot prices, MU is losing money on every memory shipment. That said, I'd be the first to admit that a derived cost of production figure represents judgmental risk.
With respect to 64 Mbit chips, there is no disagreement at this end that their day is not yet at hand,....but the pressure is there. INTC alone creates significant pressure through its latest motherboard developments. The questions then become, can MU produce these chips as or more effectively than the big Asian players (who had an earlier start) and can ANYBODY make a profit in the near term on these 64 Mbit chips, given the current glut market conditions? Certainly, if the answer to the latter question is negative (as I think is the case), it bodes ill for financially marginal players such as MU. It's also worth noting that the current glut in 64 Mbit chips adds to the pricing pressure on the 16 Mbit chips.
I heartily agree with your comment that MU is producing for a "commodity market", and that it is "stuck in a lousy sector". In saying this, I'm not trying to turn your own words against you, I am genuinely agreeing with you.....memory chip production truly is, at the moment, a very lousy sector, primarily as a result of too many players.
One last point, and one on which we can agree. I share your view that the Asian producers have enjoyed a powerful and somewhat unfair advantage, which is government-subsidized low cost borrowing. In following various tech-related industries for some time, it has been a personal tooth-grinder, (remembering that my main interest and love is the tech juniors, for whom I have raised substantial sums over the years). None of us wish to see developing jurisdictions do anything other than to join the developed nations in raising the living standards of their people. Be that as it may, many jurisdictions tilt the playing field rather steeply for their home-grown players through this practice. All that is now past tense. The semi- bankrupt IMF (what irony) is simply not sufficiently financed to do more than apply ineffective band-aids. In effect, it is now the Asian players who must endure an up-hill slog with respect to borrowing (except of course Taiwan). While in the long term this could be beneficial to MU, nevertheless the company must survive the near term. In my view, price pressure will remain intense in the memory arena as a result of Asian currency advantages as well their need to generate US dollars. In this environment, it will not be easy for ANY memory producer to make a buck in this environment. Given MU's expected losses, and exalted PE, pressure on Mu's stock price can be expected.
Best, Earlie |
