Micron: Wall Street Analyst Schizophrenia

| About: Micron Technology (MU)

Summary

"Consensus" EPS for Q2 raised to $0.74 but actual number is lower.

Wall Street analysts still don't "get" the story; need to do more basic research.

My estimate for the Feb quarter is $0.90 eps and <=$4 billion in revenue.

Mysteriously in the past month Yahoo Finance raised the "consensus" fiscal Q2 EPS estimate for Micron Technology Inc. (NASDAQ:MU) from $0.61 to $0.74. They cite a low of $0.57 and a high of $0.97 for these 20 analyst estimates. Many analysts, bloggers, and the press confuse this average with "consensus". Merriam Webster defines consensus as follows:

a general agreement about something : an idea or opinion that is shared by all the people in a group

These numbers, from Yahoo and other services are always referred to as a "consensus" whereas Yahoo actually states these are average estimates. Since Yahoo cites 1 estimate raise in the past 7 days, and 2 in the past 30 days, these raises must have been mighty large to pull the "consensus" up from $0.61 to $0.74. I read an awful lot of sell side research on Micron and believe the actual mean or median of the bulge bracket brand name firms is likely closer to the lower number as this non-scientific sample shows:

Analyst 2Q eps 2Q revenue, mm's report date
Yahoo avg $0.74 $3,980 3/28/14
B of A $0.59 $3,890 3/28/14
Bernstein $0.61 $3,969 2/19/14
JPMorgan $0.79 $4,017 2/10/14
UBS $0.57 n/a 2/7/14
Jefferies $0.57 $3,991 1/7/14
non Yahoo avg $0.626 $3,967
Click to enlarge

If SA readers have more current numbers or additional analysts, please add them in the comments.

Schizophrenia from Bank of America Merrill Lynch. On March 28, 2014 Simon Dong-je Woo and Jennifer Kim came out with two reports. The one rating Micron "Underperform" has been mentioned frequently in articles and comments here on SA. The report rating Inotera "Buy" has received little mention. These contrasting reports, on closely coupled companies, seems like saying, "I like the pearls but hate the necklace." The contradiction is possible, but not terribly logical, likely and perhaps even mathematically possible.

The Micron report cites a price of $22.24 and an objective of $19.10; the Inotera report cites a price of NT$23.30 and an objective of NY$30. They write about Micron:

The key contributors should be better than seasonal DRAM contract prices and a well-managed cost cut even using old 30nm DRAM tech.

Sounds like a upgrade should be in order! These analysts write the following about Inotera:

Our Buy rating is based on (1) good synergy with Micron, (2) a favorable competitive landscape, (3) chip demand upside, (4) high margins or capital efficiency, and (5) financial deleveraging, and dividend payments eventually.

This is a ridiculous set of distinguishing triggers as they apply equally to Micron as to Inotera. Inotera is 120,000 of Micron's ~600,000 wafers per month, Micron takes 100% of Inotera's output, Micron provides the technology and is facilitating a node shrink at Inotera, and Micron owns 35% of the company. I would submit that what is good for the goose is good for the gander. I'm not sure I can wrap my mind around a BUY on Inotera and a UNDERPERFORM on Micron.

My estimate. I've banged the drum a lot and think I will stick near the Kipp Bedard (Micron's VP of IR) guidance of $3.50 per share for the year, and take 1/4 of that or $0.87 per share for the Q2 EPS. To that I'll add a little since there was a Hynix Wuxi fire which firmed pricing. So put me down for $0.90 per share.

I'm less optimistic than some SA writers who believe revenue will be over $4 billion. And most of my skepticism for the short term is good for the medium and long term: node shrinks in both DRAM and NAND will have interrupted production, same with the Singapore DRAM to NAND conversion. Also, management has advised that more wafers are going out the door vs. finished chips, resulting in less revenue but more margin.

I will be watching gross margin carefully, and have been surprised that Micron's is never quite where I had thought or predicted. Unfortunately this will be another quarter where there are significant GAAP vs. non GAAP differences: ever more of Ron Foster's toxic convertible issuances and redemptions, the hopeful final runoff of Elpida marked up inventory, etc.

I am long a blizzard of April call options. I've purchased a bunch of January 2015 30 call options (at higher prices thank you Mr. Market!) since analysts clearly need more convincing and this story is going to take longer to play out. The long term story is intact despite the market gyrations in the last couple of weeks: no new fabs are being built, demand remains strong and very elastic in the SSD space, and the oligopoly seems to be performing together and not breaking ranks. And then there is the mystery $250mm deposit where that customer was sufficiently worried about availability to put their money down!

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.