Memory Market: Supply Rationalization Underway

Is it time to buy the memory chip stocks?

Dinesh Moorjani, an analyst at American Technology Research, this morning raised his ratings on both Micron Technology (MU) and SanDisk (SNDK), asserting that after years of dramatic supply expansion, the NAND flash And DRAM bit supply will grow far more slowly in 2009. He argues that the NAND and DRAM markets are near a cyclical bottom. He increased his ratings on both MU and SNDK to Buy from Neutral.

• For SanDisk, he notes, the big issue has been an oversupply on NAND. He says the excess will remain through the first half of 2009, but with a return to supply/demand balance in the second half driven by “the significant supply-side rationalization taking place.” He notes that bit growth in 2009 will grow 84% - sounds high, but that is the slowest growth since the inception of the industry, he says. “Capacity expansion has come to a standstill,” he writes, with 200mm capacity coming offline.

  Meanwhile, he asserts that the company’s strong IP position provides “cost structure and valuation support.” He says SNDK has the strongest IP portfolio in the flash business, and asserts that the IP alone is worth $8-$9 a share, or $5-$6 if you assume zero forward royalties from Samsumg. He notes that the company also has $6.29 a share in net cash, with no debt due in the next four years.

  Moorjani set a $14 price target on the stock.

• For Micron, the primary issue has been the excess supply of DRAM. He says that DRAM makers are taking steps to rationalize supply, through product cuts and delayed capacity expansion plans. Even if government bailouts or consolidation prevents the failures of Qimonda or the Taiwanese DRAM companies, he says, “we are still unlikely to see capacity expansion next year.” Despite the bleak outlook for 2009, he sees the DRAM business coming back into supply/demand balance. He sees continued over supply in the first half of 2009, but under supply in the second half. Moorjani contends MU will emerge stronger from the current downturn given its relatively healthier balance sheet. He set a $4 price target

At today's close, SNDK is up $1.15 , or 14.2%, to $9.23; Micron is up 23 cents, or 12.7%, to $2.04.