Analyzing Micron's Downside

Micron (MU) shares have dropped to their lowest level since 2003, pressured by the announcement Thursday night of an ugly earnings report for the fiscal first quarter ended in November.

Reading through Friday morning’s batch of research, several things become obvious. One, the Street is mighty tempted to take a flier on MU, with the stock trading at well under 1x book value. Two, the analysts seems impressed with the company’s efforts to cut costs. Three, there is no near-term sign of recovery in pricing for DRAMs and NAND flash. And four, you really ought to stay away from this stock right now, until there is some sign of improvement in the fundamentals of the memory chip industry.

Micron compounded its woes by raising its FY ‘08 capital spending forecast to a range of $2.5 billion to $3 billion, from $2 billion to $3 billion. And one other thing to keep in mind: that book value number that is so tempting is a moving target, and in the current environment will keep shrinking. DRAMs right now are selling below cash production costs.

Here are a few excerpts from this morning’s reports on the company:

• Shawn Webster, J.P. Morgan: “MU appears to be gaining share…however…we are concerned with the higher capex expectation given the excess capacity in the memory industry.” He remains Neutral on the stock.
• John Pitzer, Credit Suisse: He keeps an Outperform rating on the stock, but cuts his target to $10 from $17.50. Pitzer notes that the stock is trading at 0.9x tangible book, which “should limit further downside in the stock.”
• Tim Luke, Lehman: Maintained Equal Weight rating; cut target to $9.50 from $13. Luke writes that he is encouraged by cost savings and NAND bit growth, but that they may be offset by price erosion and slowing PC bits/box growth.
• Robert Burleson, ThinkEquity: Cut target to $9 from $13, but maintains Accumulate rating. He expects “a weakening macro environment to keep MU shares range bound with limited upside despite attractive valuation levels.”
• James Covello, Goldman Sachs: Maintains Neutral rating and $8 target. Covello says he would no longer short the stock, but also sees no reason to buy it. He advises staying away until Samsung “meaningfully” cuts capital spending. “Samsung’s capex remains extremely high with current indications of only a 10% capex cut for 2008 when a 20% or more cut from Samsung will be necessary to fix the current severe excess supply situation,” he writes.
• Atif Malik, Morgan Stanley: Maintains an Underweight rating and $9 target. He writes that his bearish thesis is playing out, “as weak industry memory pricing, coupled with decelerated NAND cost ramp, led to poor margins and earnings.”
• Daniel Berenbaum, Caris: His rating remains Below Average; price target drops to $6.50 from $7. “A destructive market share battle and significant manufacturing oversupply will continue to weigh on industry profitability for the foreseeable future,” he writes.
• Daniel Amir, Lazard Capital: He maintains a Buy rating, but cut his target to $12 from $14. He notes that gross margins in the quarter of 0.3% were far below his estimate of 7%. “Micron stock is correlated to DRAM,” he notes. “The current DRAM market remains challenging and a lack of ASP improvement could dampen future earnings results.”
• Kevin Vassily, Pacific Crest: Maintains a Sector Perform rating. His headline nicely summed up the situation: “FQ1 Earnings: Well That Was Unpleasant.” He adds that there was no progress announced on spinning off the image sensor business, “which surprised us.”
• Doug Freedman, American Technology Research: He keeps a Buy rating, but cuts his target to $10 from $14. “Trough valuation remains a moving target as losses mount and book value remains a moving target.”

Micron Friday is down 39 cents, or 4.9%, at $7.53.

Comments

[stockguru:]

Eric ,
Can you please pass on my letter to your friend at barrons!! Mr Bill Alpert!!!
Dear Bill,

I was astonished to see how biased and full of dirt you could be in your latest article on LDK. I think you do not read any other news than barrons since you do not know the difference between self acquittal and audit by Big Four firms. Is this attack to justify your opinion on LDK in october which was proved to be wrong recently? I believe that as an editor at once reputed Barrons you should keep your biased opinions to yourself and rather write some unbiased articles showing us facts rather than using your imagination and being paranoid. If you want to post your personal opinions, you can start a personal blog against LDK. I even have a title for you in my mind "How LDK pissed me off by being Right". You seem to blindly believe in Situ rather than a reputed firm. Can you please enlighten LDK investors by giving a solid reason for that rather than basing your articles on some vague sources. I must also warn you that you might be testing the patience of investors who are being hurt by your sensational one sided journalism. If you do not stick to facts and reality you might be required to divulge your sources in the court of law in the very near future.

thanks

2007 Dec 23 06:26 PM

[PK de C'ville:]

Eric,

I'd advise your readers to short MU because MU are about to have their head handed to them, being the central conspirator in one of the most sordid tales of corporate thuggery in US History.

MU was granted amnesty in exchange for blowing the whistle on their decade old price fixing conspiracy whose main purpose was to bankrupt Rambus and steal their intellectual property. The other conspirators have already pled and paid fines of nealry $ 1B and have had over 15 executives serve an average of 6 months each in our federal penitentiary system.

So, how about warning your readers that MUs past criminal acts are just about to catch up to them, possibly resulting in bankruptcy?

2007 Dec 24 04:51 AM

[stockguru:]

Eric ,
Have you worked for a hedge fund too in the past like your friend bill alpert???
please check the bio of bill alpert!!
informedinvestors.com/...
he worked for a hedge fund in past!!!
Mr. Alpert began his journalism career as a general assignment reporter for the Hudson Dispatch in Union City, N.J., where he worked from 1981 to 1982. He first joined Barron's as a staff writer in 1984. He resigned in September 1988 to become a stock analyst at a research-oriented hedge fund. He rejoined Barron's in 1996

2007 Dec 25 12:10 AM

[stockguru:]

someone on yahoo by name of gungbao2003

It has been claimed and I quote from Bill Alpert's Barrons' Article:
"What dismayed investors were September-quarter gross margins of 30.8% -- down from 35% in June and 39% in 2006. Piper Jaffray's Jesse Pichel noted that LDK gross margins were still an inexplicable 10 percentage points above those of peer ReneSola (SOLA). LDK inventory is turning just 2.2 times a year. Pichel downgraded the shares to a Sell with a price target of 34.50."

In summary the answers to why RENESOLA's margins are 10% points lower than LDK are found in RENESOLA's press releases and financial statements. The difference is in the technology. Majority of RENESOLA's solar wafers produced up to 3rd Qtr of 2007 are monocrystalline wafers while LDK's are MULTIcrystalline wafers. Why would this difference account for LDK's margin's being better?

First, RENESOLA in their IPO papers stated and I quote from
buchanan.uk.com/cgi-bi......
"In early 2007, the Directors intend to commence the installation of 15 multicrystalline furnaces, which each have a capacity in excess of 2,400 kg per month. Multicrystalline furnaces are more energy efficient than monocrystalline furnaces and require a lower grade of polysilicon which would improve the yield from ReneSola's raw materials."

What happened since then? Did RENESOLA achieve full capacity production yet on cheaper and more efficient Multi-crystalline solar wafer production? The answers are in RENESOLA's 3rd quarter ER. renesola.com/investorR......

"ReneSola commenced the installation of multicrystalline furnaces in September following the delivery of the coated crucibles. 15 multicrystalline furnaces, with a combined manufacturing capacity of 75 MW, have now been delivered and installed and are in initial production. The remaining 17 furnaces will be delivered and installed, as planned, by the end of 2007."

If you use your brains, then you would see that majority of RENESOLA's products were still made using the less efficient mono-crystalline methods and they are just going on-stream with Multi-crystalline production in 4th Qtr of 2007. RENESOLA is just playing catch up to LDK and are aware their margins are lower hence their decision to switch to the more efficient production of multicrystalline wafers.

2007 Dec 25 07:40 PM