As I noted on Thursday, the company reported fiscal fourth quarter revnue of $1.4 billion, in line with expectations, with profits of 8 cents a share, below the Street forecast of 14 cents; without one-time charges, profits would have ben 13 cents a share.
While the Street is happy to see the company’s diversification moves working - in addition to DRAMs, the company also makes flash memory and image sensors for digital cameras - they were not happy with the quarter’s results. Here’s a rundown on some of this morning’s analysts comments, starting with a downgrade by Doug Freedman of American Technology Research to a “Sell.”
• Doug Freedman, American Technology Research: We are downgrading shares of MU from Buy to Sell and decreasing our price target from $20 to $14…Excluding one-time charges EPS came in at 13 cents. While we recognize this downgrade looks like a knee jerk reaction to the earnings report, the report was not as bad as it looks on the surface when dissected…We are downgrading…based on the increased execution risk involved in the ramp of IMFT (IM Flash Technologies, the company’s joint venture with Intel) NAND in two 300mm Fabs at one time…This is the second quarter in a row that the company reported increased operational profits, but missed Street expectations. Last quarter we were advising investors to buy the sell-off, this quarter we think we are too close to the IMFT NAND ramp with increased execution risk.
• Joe Osha, Merrill Lynch: The diversification efforts that Micron has undertaken since the beginning of 2005 have yielded substantial results, and a substantial return in the stock price as well. Unfortunately, the company’s ability to capitalize on an extraordinarily good DRAM market has been much less than what we’d hoped. Micron is on the right track, but the rate of improvement is clearly slowing, and we think that the stock price now fully reflects that. We’re downgrading our investment recommendation from Buy to Neutral…Larger than expected NAND losses were the biggest factor…for the earnings miss, as NAND revenue exceeded our expectations while gross margin for the business were negative. We knew that Micron was in the process of ramping a low-margin business, but it looks to us like Micron is willing to lose more money in that business than we thought. We also see the NAND flash business getting shakier as we enter 2007, and the likelihood of NAND becoming an even bigger drag on earnings is higher than we thought.
• Tim Luke, Lehman: Maintain neutral rating given our view that while DRAM, where MU is lowering exposure, may remain broadly stable, NAND pricing may weaken into [the first half of 2007] as MU ramps its capacity.
• Glen Yeung, Citigroup: The bull case on Micron has been the recent increase in PC DRAM spot pricing, diversification into NAND flash and CMOS image sensors, as well as the onset of Vista in January 2006, which drives higher DRAM content per PC. However, we see potential near-term pricing weakness for PC DRAM (40% of Micron’s sales) as the industry faces seasonal declines in November and December when holiday builds wane, exacerbated by PC OEMs that are currently building DRAM inventory working from stockpiles. Rating: Hold.
• John Barton, Cowen: While Micron continues to successfully diversify into
higher-margin products such as image sensors and specialty DRAMs, we believe the company should not be viewed as a pure play on an improving DRAM pricing environment. We believe the majority of the upside has already been priced in these shares and maintain our Neutral rating.
• Eric Ross, ThinkEquity: Micron posted a moderate quarter (after taking out one time legal settlement costs) but the Lexar acquisition - while a good strategic move - may be dilutive in CY07. Growth in new businesses are strong but margins in DRAM seem lower than what we would have expected (given its strength). We believe Micron is close to fairly valued at current prices but may show some upside if it can find additional synergies with Lexar. We reiterate our Accumulate rating.
• Rick Whittington, Caris & Co.: Diversification moves into cell phone related chips, which benefited MU the past year worked somewhat against the company in the period just ended, but this is expected to reverse in the current quarter and beyond as what is viewed by the company as a recent inventory correction sort out. Further, NAND investments incurred were significantly above our model in the just ended quarter. Cost reductions in both DRAM and NAND in the upcoming year are thought to outweigh, perhaps significantly, memory pricing deterioration…Maintaining Buy Rating.
MU 1-yr chart: