Micron Down, Analysts Worry About Memory Oversupply

 |  Includes: MU, QI
by: Eric Savitz

Micron (NASDAQ:MU) shares are sharply lower Monday on a flurry of bearish Street commentary ahead of the company’s announcement this Thursday of results for the its fiscal first quarter ended November. The bearish chatter is also dragging down shares of Qimonda (QI). There were cautionary calls Monday morning from Caris & Co., American Technology Research and Jefferies. Even the bulls on MU are ratcheting down expectations.

Caris & Co.’s Daniel Berenbaum Monday morning launched coverage of both memory chip companies with Below Average ratings. He set $7 price targets on both Micron and Qimonda. Berenbaum writes DRAMs are likely to be in oversupply through the third quarter of next year, with difficult pricing and limited profitability.

Berenbaum says that Qimonda “faces serious financial and technology challenges in the midst of a destructive market share battle that is already limiting overall memory industry profitability.” He says the company is going to need to do a financing soon, asserting that even with $500 million from the sales and leaseback of fab equipment, cash is likely to dip below working capital requirements by the end of next year. He also notes that the 77% stake held by parent Infineon (IFX) remains an overhang for the shares - he thinks the stake will be cut to under 50% by February 2009.

As for Micron, he notes that there are “significant near-term profitability hurdles as destructive market share battles rage in both NAND and DRAM.” He adds that while the company should get some help from cost reductions and premium pricing, but that “being the best in a bad industry may not be enough.”

He also notes that DRAM is is not the only issue for Micron: NAND contract pricing is down 45% over the course of the fourth quarter, with spot prices 30% below contract prices.

Doug Freedman of American Technology Research Monday cut his price target on the stock to $14, from $15.50, though he remains bullish and maintains a Buy rating. He expects the results this week will reflect ASP and margin erosion in both DRAM and NAND due to over-supply and seasonality. He sees a potential catalyst in more details on a much-discussed spin-off of part of the company’s image sensor unit. Freedman cautions that he is concerned that his current forecast for a return to profitability in the May 2008 quarter “will once again prove too soon.”

Jefferies & Co.’s John Lau
cut his price target on the stock to $12 from $15, though he also maintains a Buy rating on the stock. Lau’s price target cut reflects weakening pricing in both NAND and DRAM. On the other hand, he asserts that “with strong end market demand and overall restraining capital expenditure environment…MU stock has limited downside risk.”

Micron Monday is down 48 cents, or 5.7%, at $7.89. Qimonda is down 14 cents, or 1.7%, at $7.91.