Micron Technology (NASDAQ:MU) is in the semiconductor memory business. To say that the recent history of the semiconductor memory business has been poor is an understatement of galactic proportions. Japanese and Taiwanese memory companies have been bankrupted just like the American and European memory companies before them. Micron has been "Hoovering" up these companies up with wild abandon; sort of like paying for the privilege to lose more money. On the plus side they have been buying these irreplaceable assets for pennies on the dollar.
The most recent of these acquisitions is the impending closing on the buyout from bankruptcy of Elpida Memories of Japan. More on that later.
Micron Technology reports earnings on Wednesday, June 16, 2013 after the market close. Since Sunday three analyst upgrades have taken place; Jeffries on Father's Day, TP $20 from $13, Credit Suisse, TP $20 from $14, Citi, TP $19 from $13.50.
I think they are low, but then I always think my "Honeys" are not treated fairly by the street, and I often get the precise numbers wrong. With that disclaimer out of the way, I will let you into how my brain works (it's like going to a bad neighborhood after dark.)
Below is a table of prices, chips sizes, and wafer revenue during the bottom and at the present top of the market. Some of the information is spot on and some is educated guesses.
|Device||Approx chip size||Number per 300mm wafer||Approx low contract price||Approx low spot price||Approx|
High contract price
High spot price
|Revenue per wafer|
Something unprecedented in my career and life has occurred here. The thing that hits you first is the increase in the memory unit prices from the low market to the present market. In the case of a 2Gb DRAM chip the increase is 170%! The 4Gb DRAM chip increased about 184%. NAND was crazy as well with "only" 74% on the 64Gb and about 177% on the 128Gb chip.All of these price increases have happened since December 3, 2012. Mindboggling.
So what I really want to know is the actual cost of Micron wafers. Since there has been the addition of 60,000 wafer starts per month from Inotera in January, I'm going to go back into the pre-January quarter to get total cost of goods at a stable number of wafers processed. The Micron quarter ended November 29, 2012 had a CoGs of $1.617 billion. Since, from recently released information, we know that Micron, as Micron, was processing about 1.14 million wafers for that quarter. So the average manufacturing cost per wafer including, test and packaging, must about $1400, give or take. Looking at those wafer numbers above, we can assume that those four parts represent the vast majority of Micron's sales and any others that are outside of the four above would have followed a similar pricing curve.
Now comes the hard part; divining the amount of the price increases that has passed through since prices began to rise back in December of 2012. Certainly spot price is too high, but the current contract price might serve as reasonable average wafer revenue, so let's go with that. That number is a little over $2600.
$2600 - $1400=$1200, $1200/$2600 = 46% gross margin. At $2600 per wafer, total sales on $1.14 million wafer would have to be over $2.9 billion for the quarter. Gross profit at 46% would be $1.334 billion. Last quarter all R&D, SG&A, interest and taxes (excluding one-time events) were about $450 million. That would leave $884 million as bottom line or net profit. Over 1.016 billion shares we get $.87 per share.
OK, OK, that just can't be right, can it? I would be very comfortable cutting that in half to $.43/share. For you sissies out there we can cut it in half again to $.22/share while the street estimate is at $.02/share. That should get some head-slapping.
Back to Elpida. Elpida is a combination of NEC, Hitachi and Mitsubishi memory operations. I think everyone here will be very surprised what these super talented people can do once they have been given a new air tube by Micron. As soon as Apple (NASDAQ:AAPL) knew Elpida would be saved, they contracted to take half their output of mobile DRAM and clamp off Samsung. Tidbit: Mobile DRAM separates the men from the boys in the memory business, Elpida is the best.
Citi will admit to $.88/Micron share/year Elpida accretion to earnings. Elpida has an output of 540,000 high demand, primarily mobile DRAM, wafers per quarter. They should certainly be able to get $3000 revenue per wafer or about $1.6 billion revenue. If Micron can do 30%, or 15% or, heaven forbid, only 7.5% net on sales, Elpida with 80% of their depreciation gone should be able to thumb up 20% net profit. That would be about $1.25/Micron share per year or about $.30 per share. Citi at $.22/share per quarter is remarkably close to my simple figures. Makes me wonder why all the analysts are so chicken about Micron itself, yet have a good handle on the Elpida earnings.
Bottom line is that Micron plus Elpida will earn well over $4.00 per share per year as soon as the next 12 months.
We have Wednesday and two more earnings announcements to watch this play out. Buy the stock or call options at the open and join me for the fun Wednesday afternoon.