Micron Technology: Volatile Sector Makes This A Shaky Stock

| About: Micron Technology (MU)

The broad market rally on September 7, 2012, saw the Dow at its highest level since 2007 and the S&P 500 ending at its highest level since 2008. The new European bond buying program was instituted to stem that region's debt crisis and provided a much needed boost in confidence to world capital markets. Stronger-than-expected domestic service sector and labour market data added fuel to the fire and saw materials, financials and industrials gaining more than 2%.

Micron Technology Inc. (NASDAQ:MU) added 7.8% to its share price on September 7. While the broad market advance definitely played a large part in this increase, the business activity of other companies in the same space led buyers to Micron, which also provided a portion of the boost. In addition, some of the recent share price activity in the companies in this space has also been driven by speculation as to mergers, acquisitions and rationalizations.

Micron manufactures semiconductor devices, data storage and retrieval products. Its products include data random access memory products (DRAM), NAND flash memory products and NOR flash memory chip products. NAND and NOR flash memory do not require power to retain data or memory. Flash chips are used in high speed, high capacity storage drives. Markets that fuel the demand for the chips are the smartphone and tablet markets which continue to provide steady outlets for Micron's chips.

OCZ Technology Group Inc (NASDAQ:OCZ), a solid state drive manufacturer of ultra fast storage products, experienced a shortage of NAND flash memory chips that make its drives work. As a result, earnings in its recent quarter came in 15% below management's guidance - which had a negative impact on the stock. Despite high demand for the storage products, the industry wide tightening of supply left the company with back orders. It was unable to fill orders in a timely manner, resulting in customers to look to other suppliers.

The shares in chip makers, such as Micron and SanDisk Corporation (SNDK), benefited from OCZ's misfortune. The industry has been experiencing over supply and chip makers have diminished manufacturing output in order to stem the drop in chip prices. To paraphrase Micron's president of the NAND division, the company, like its peers in the industry is not looking to add a lot of capacity and is not going to for some time, but as long-term demand in new applications kicks in, a different dynamic will favor the NAND suppliers that manufacture their own high speed storage drives.

Other companies in the realm are: Seagate Technology (NASDAQ:STX) a manufacturer of hard drives for enterprise storage; Fusion-io, Inc. (NYSE:FIO) a developer of storage memory platforms for enterprise; STEC, Inc. (NASDAQ:STEC) designs and manufactures solid state drives, flash cards, modules and DRAM modules; and Western Digital Corporation (NYSE:WDC), which manufactures storage product for digital content.

Micron's fiscal third quarter 2012 results for the period ended May 31, 2012, showed net sales of $2.2 billion and a net loss of -$320 million or -$0.32 per share compared to net sales of $2 billion a net loss of -$282 million or -$0.29 per share for the previous quarter. The third quarter 2011 delivered net income of $75 million or $0.07 per share on net sales of $2 billion.

Revenues from DRAM product sales were 20% higher in the third quarter of fiscal 2012 due to a 12% increase in sales volume and a 7% increase in average selling prices, compared with the second quarter of fiscal 2012. The second quarter 2012 included the adverse impact of a $58 million one-time charge to revenue. Revenues from sales of NAND Flash products were higher on a 40% increase in sales volume, offset by decreases in average selling prices. Sales of NOR Flash products were approximately 10% of total net sales in the third quarter. The company's consolidated gross margin was 11% in the third quarter. Improvements in margins from sales of DRAM and NOR Flash products were partially offset by declines in margins from sales of NAND Flash products.

Cash flow in the quarter of $686 million included a $300 million advance from Intel resulting from expansion of its IM Flash activities. The company raised $875 million in convertible debt and invested approximately $325 million in capital expenditures. Micron forecasts that the NAND market will improve in the first half of 2013 providing an advantage for its supply program.

Micron currently trades around $6.40, between a 52-week range of $3.97 and $9.16. It has negative earnings per share of -$0.94 and does not pay a dividend. The company has total cash of $2.32 billion and total debt of $3.20 billion and a current ratio of 2.59. Book value per share is $7.85. The stock is 85.4% owned by institutions and 2.69% owned by insiders, leaving only approximately 12% of the float available for retail investors. The float was 8.65% short as of August 15, 2012.

Western Digital has institutional ownership in its shares in excess of 79%, STX over 74%, OCZ, over 78%, and SNDK over 88%. Portfolio managers obviously like having stocks from this sector as part of their asset mix. Retail investors who are looking for a little excitement may look to this sector for diversification. Traders may look to this sector to take advantage of any swings in sentiment, new demand pipelines, or ride the coat-tails of takeover speculation. The short position indicates that some pullback in the stock is expected in the short term.

Chip makers are able to stem supply to stop production price erosion. These companies can make chips to meet and exceed the demands placed on the market by the massive proliferation of tablets and smart phones. In fact, these companies have to voluntarily reduce production in order to protect the prices of chips on the market. Supply is driver to survival of these companies.

Micron's current ratio is a positive indicator for the company as it has $2.59 to cover every $1 in debt it currently has. It is trading below book value and its total debt to total cash position is healthy in a cheap, high debt market environment.

Micron has great fundamentals, but the market for these stocks is incredibly volatile. A buyer for Micron has to have specific and disciplined entry and exit points. The prospect of the stock price doubling is not something that I can rationally see, given the oversupply landscape of the industry. There are too many manufacturers in the market, too much product and too many suppliers regardless of any kind of collective sentiment among suppliers to squeeze supply.

Value investors will like the fundamentals, but have to consider the industry as a whole and Micron's ability to retain value in a volatile business environment. Unless you are an industry insider and have a complete grasp on the benefits of a merger or acquisition between any of the companies in space, any talk of this kind of activity is pure speculation. This is a great stock for speculators and short-term traders. There has to be a shift from the supply centric nature of Micron and its peers before retail buyers and hold investors enter into the market.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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