Micron: Are The Analysts Getting Cold Feet?

| About: Micron Technology (MU)

The holidays have not been kind to Micron (NASDAQ:MU). The stock has been downgraded and the stock price has declined. From December 20, 2013 to Jan 3, 2014 the stock price has declined $1.20 or a little over 5%. So, the end of the world is not quite here yet.

There seems to be some hanky-panky with the up/downgrades. Seeking Alpha contributor, ElectricPhred posted this link to a CS (Credit Suisse) Micron report dated 1/3/2014. Rated outperform (buy), $.60/share earnings estimate, $25 price target.

On the other hand, we have an article by WKRB that claims CS downgraded Micron from outperform to market perform on 1/3/2014. Now that just can't be true. The article is a summary of downgrades of Micron. It makes you wonder about the motive and clients of WKRB.

The "consensus" of 29 analysts for Micron first quarter earnings, according to Yahoo, is now $.43. The range of Micron earnings among the 29 analysts is $.18 to $.72. So, there really is no consensus, only an average. I guess some of the analysts are uncertain about Micron or have another agenda or master.

Some of this uncertainty comes from whether the analyst believes, "this time is different" in the memory business or, "This time is not different."

I have offered my opinion on why I think this time is different in a Seeking Alpha article a month ago and that opinion is still valid. A very short summary is: Nation-states are now out of the business, the severe cycles were when there was just DRAM. Now NAND is a big factor, soon to become the biggest factor. The PC market used to be the sole market for the sole product, DRAM. Now we have DRAM and NAND. Mobile devices now use more DRAM than PCs. NAND is used in mobile, toys and trinkets, and the soon to explode solid state drive business.

For some analysts it is hard to think about the "new" memory business.

Let's disassemble Micron and try to come to some estimate of earnings for the first quarter due to be reported on January 7, 2014.

We can go all the way back to the pro-forma earnings statement of February 5, 2013. On page 72 of the PDF version we can see the cost of goods sold for Elpida and Micron of the time. After the pro-forma adjustments for Elpida (basically taking depreciation out of the cost) we have a cost per wafer (assuming 540,000 wafers per quarter) of $1075 per wafer. These are all DRAM wafers, maybe half mobile DRAM and half PC DRAM. The 540,000 wafer represents about 1.5 billion 4Gb chip equivalents. If Apple (NASDAQ:AAPL) bought all their requirements of mobile DRAM from Elpida, it would have been about 400 million chips or less than 30% of the Elpida output. These chips were sold in wafer form and, therefore, were quite cheap. Figure about $3 per chip or $2100 per wafer. The other wafers probably generated about $4 per chip or $2800 per wafer. A reasonable average wafer price for Elpida for the first quarter is probably about $2450. So, Elpida revenue should be about $1.3 billion. Cost should be $580 million or 55% gross margin. The Elpida op ex and interest totaled about $165 million in the pro-forma quarter. We can assume that is up some, so let's try $225 million. We have $720 million gross profit minus $225 million op ex is $495 million operating profit. Figure provision for Income taxes at 30% and we come up with $347 million net profit.

The same pro-forma puts the micron wafer cost at about $1500. Micron didn't have the bare wafer low prices of Elpida, so it would be reasonable to assume that the 1.08 million Micron wafers brought about $2800 per wafer revenue or a little over $3 billion revenue, and about $1.4 billion gross profit. The pro-forma op-ex and interest for Micron was about $430 million, but we can make that $500 million for the first quarter. That give $900 million operating earnings for the Micron part, 30% provision for taxes and we get $630 million for net profit.

Combined, we get $977 million in net profit. Divided by 1.05 billion shares and we have…drum roll, please, $.93 per share on Tuesday night.

Now everyone reading this knows that I am an unreformed optimist, so cut it back by any percentage that you deem appropriate. Am I 80% right? That would be $.74 per share. That's getting pretty close to the high analyst estimate of $.72 per share.

Combined revenue for the quarter would be about $4.3 billion, which sounds a little high until you recall that Micron president Mark Adams indicated that the combined company would have a $16 billion annual "clip" about 10 months ago….before the full DRAM price increases were in place.

We know that the wild card is Micron management. They can screw up a two car parade and hide earnings very effectively, but it is really hard for me to see anything but a massive blowout on earnings next week.

Disclosure: I am long MU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.